In retroviruses, the viral protease (PR) is released as a mature protein by cleavage of Gag, Gag-Pro, or Gag-Pro-Pol precursor polypeptides. In avian sarcoma and leukemia viruses (ASLV), PR forms the C-terminal domain of Gag. Based on the properties of a mutation (cs22) in the cleavage site between the upstream NC domain and the PR domain, the proteolytic liberation of PR previously was inferred to be essential for processing of Gag and Pol proteins. To study this process in more detail, we have analyzed the effects that several mutations at the NC-PR cleavage site have on proteolytic processing in virus-like particles expressed in COS and quail cells. Mutant Gag proteins carrying the same mutations also were synthesized in vitro and tested for processing with purified PR. In both types of studies, N-terminal sequencing of the liberated PR domain was carried out to exactly identify the site of cleavage. Finally, synthetic peptides corresponding to the mutant proteins were assessed for the ability to act as substrates for PR. The results were all consistent and led to the following conclusions. (i) In vivo, if normal processing between NC and PR is prevented by mutations, limited cleavage occurs at a previously unrecognized alternative site three amino acids downstream, i.e., in PR. This N-terminally truncated PR is inactive as an enzyme, as inferred from the global processing defect in cs22 and a similar mutant. (ii) In Gag proteins translated in vitro, purified PR cleaves this alternative site as rapidly as it does the wild-type site. (iii) Contrary to previously accepted rules describing retroviral cleavage sites, an isoleucine residue placed at the P1 position of the NC-PR cleavage site does not hinder normal processing. (iv) A proline residue placed at the P2 position in this cleavage site blocks normal processing.