A lysate of purified insulin secretory granules, which contains two types of proinsulin processing activity (type 1, Arg-Arg-directed and type II, Lys-Arg-directed (Davidson, H.W., Rhodes, C.J., and Hutton, J. C. (1988) Nature 333, 93-96), was found to process proalbumin by specific proteolytic cleavage of the COOH-terminal side of the Arg-2-Arg-1 sequence. The subcellular distribution of proalbumin processing activity in insulinoma tissue paralleled that for proinsulin conversion and occurred principally in a secretory granule fraction. Cleavage appeared to result from the Arg-Arg-directed type 1 proinsulin processing endo-peptidase. It was Ca2+-dependent (K0.5 activation = 1.0-1.5 mM Ca2+), unaffected by group-specific inhibitors of serine, cysteinyl, or aspartyl proteinases, and had an acidic pH optimum (5.5). Active-site inhibitor studies showed this activity had a preference for dibasic over monobasic amino acid sequences and indicated that the sequence of the dibasic site was an important determinant of the susceptibility of the substrate to cleavage. The activity did not process the proalbumin Christchurch mutant (Arg-2-Arg-1 to Arg-2-Gln-1). It was inhibited by the variant alpha 1-antitrypsin Pittsburgh (Met358 to Arg358; K0.5 = 100 nM) but not by other related proteins normally co-secreted with albumin from hepatocytes, namely alpha 1-antitrypsin M, alpha 2-macroglobulin, or antithrombin III. The insulin secretory granule proalbumin processing activity was indistinguishable from a proalbumin endopeptidase reported in rat liver membranes and similar to the yeast KEX-2 protease. These findings suggest that a highly conserved set of proprotein endopeptidases exists, which are specific for a dibasic sequence but broadly specific for proprotein substrates. Such enzymic activities appear to be active within both the constitutive and regulated pathways of secretion. Intraorganellar Ca2+ and pH appear to play a key role in regulating their activities.