Pepstatin is a low molecular weight, potent inhibitor specific for acid proteases with a Ki value of about 10(-10)M for pepsin. The chemical structure of pepstatin is essentially a hexapeptide which contains two residues of an unusual amino acid, 4-amino-3-hydroxy-6-methylheptanoic acid (statine). The complete structure of pepstatin is isovaleryl-L-valyl-L-valyl-statyl-L-alanyl-statine. To study its mode of inhibition, we prepared several derivatives and measured their kinetics of inhibition. Both N-acetyl-statine and N-acetyl-alanyl-statine are competitive inhibitors for pepsin with Ki values of 1.2 x 10(-4)M and 5.65 x 10(-6)M, respectively. The Ki value for N-acetyl-valyl-statine is 4.8 x 10(-6)M. These statyl derivatives, therefore, are very strong inhibitors. The Ki value for N-acetyl-statine is 600-fold smaller than that of its structural analog N-acetyl-leucine. The derivative which contains two statyl residues in a tetrapeptide exhibits inhibitory properties which approach those of pepstatin itself. Other acid proteases, human pepsin, human gastricsin, renin, cathepsin D, the acid protease from R. chinensis and bovine chymosin, also are inhibited by pepstatin and its derivatives. We suggest that the statyl residue is responsible for the unusual inhibitory capability of pepstatin and that statine is an analog of the previously proposed transition state for catalysis by pepsin and other acid proteases.