Mutations in DJ-1, a protein of unknown function, were recently identified as the cause for an autosomal recessive, early onset form of familial Parkinson's disease. Here we report that DJ-1 is a dimeric protein that exhibits protease activity but no chaperone activity. The protease activity was abolished by mutation of Cys-106 to Ala, suggesting that DJ-1 functions as a cysteine protease. Our studies revealed that the Parkinson's disease-linked L166P mutation impaired the intrinsic folding propensity of DJ-1 protein, resulting in a spontaneously unfolded structure that was incapable of forming a homodimer with itself or a heterodimer with wild-type DJ-1. Correlating with the disruption of DJ-1 structure, the L166P mutation abolished the catalytic function of DJ-1. Furthermore, as a result of protein misfolding, the L166P mutant DJ-1 was selectively polyubiquitinated and rapidly degraded by the proteasome. Together these findings provide insights into the molecular mechanism by which loss-of-function mutations in DJ-1 lead to Parkinson's disease.