Purified placental lipocortin I but not lipocortin II was proteolyzed during A431 cell membrane-catalyzed phosphorylation reactions. Proteolysis was Ca2+-dependent but was not prevented in the presence of a variety of inhibitors of Ca2+-dependent proteases, suggesting that the Ca2+ effect is a property of lipocortin I itself. Proteolysis was inhibited by Triton X-100 or dithiothreitol and was temperature-dependent, occurring at 30 degrees C but not at 0 degrees C. Tyrosine phosphorylation and proteolysis are distinct events as both phosphorylated and nonphosphorylated lipocortins could be cleaved by the membrane protease, but prephosphorylation enhanced the rate of proteolysis 2-fold during the initial reaction and by 60 min almost half of the phosphorylated lipocortin was proteolyzed. Cleavage of the 38-kDa phosphotyrosyl lipocortin I generated a truncated 37-kDa form of lipocortin which retained the phosphate label, indicating that proteolysis occurred at a site N-terminal to the site of tyrosine phosphorylation, possibly at tryptophan 12. Ando, Y., Imamura, S., Hong, Y.-M., Owada, M.K., Kakunaga, T., and Kannagi, R. [1989) J. Biol. Chem. 264, 6948-6955) have recently reported that in vitro cleavage at sites in the N-terminal tail region of lipocortin I by exogenously added proteases dramatically enhanced the Ca2+ sensitivity of phospholipid binding by lipocortin. The demonstrated ability of an endogenous membrane protease to catalyze a similar and specific cleavage in a Ca2+-dependent manner indicates that this event may occur in the cell where it would have important effects on the functional properties of lipocortin I.