Acyl-peptide hydrolase, which catalyzes the hydrolysis of an N-terminally acetylated peptide to release an N-acetylamino acid, was isolated from rat liver and found to be N-terminally blocked. The kinetics of the hydrolysis of acetyl (Ac)-Ala-Ala, Ac-Ala-Ala-Ala, acetylalanine p-nitroanilide, and acetylalanine beta-naphthylamide were investigated. The Km values were between 1 and 9 mM, and the Vmax values were between 100 and 500 nmol/min/micrograms of enzyme. The enzyme activity toward acetylalanine p-nitroanilide and acetylalanine beta-naphthylamide was activated by the presence of Cl- and SCN- at concentrations between 0.1 and 0.5 M. By contrast, the activity toward Ac-Ala-Ala and Ac-Ala-Ala-Ala was inhibited by these anions. Among a series of divalent cations, Zn2+ was demonstrated to be the most potent inhibitor. The enzyme was inactivated by the addition of diisopropyl fluorophosphate, diethyl pyrocarbonate. Woodward's Reagent K, and glycine methyl ester/carbodiimide. Titration by diisopropyl fluorophosphate showed 0.7 mol of active serine/mol of enzyme subunit, which was confirmed by the incorporation of [3H]diisopropyl fluorophosphate into the enzyme. Acetylalanine chloromethyl ketone inactivated the enzyme following pseudo-first order kinetics; and Ac-Ala, a competitive inhibitor, protected the enzyme from this inactivation. Acyl-peptide hydrolase appears to be a serine protease utilizing a charge relay system involving serine, histidine, and, probably, a carboxyl group(s). Two series of acetyl dipeptides, acetylamino acid p-nitroanilides and acetylamino acid beta-naphthylamides, were prepared in order to determine enzyme specificity. The enzyme preferentially removed Ac-Ala, Ac-Met, and Ac-Ser, the most common acetylated N-terminal residues (Persson, B., Flinta, C., von Heijne, G., and Jörnvall, H. (1985) Eur. J. Biochem. 152, 523-527). The enzyme was shown to be useful for deblocking peptides (e.g. alpha-melanocyte-stimulating hormone and acetyl-renin substrate), and the crude enzyme/substrate mixtures were amenable to direct protein sequence analysis.