Evidence is presented that calpain, a calcium-activated protease, degrades the cyclin-dependent kinase inhibitor, p27, during the mitotic clonal expansion phase of 3T3-L1 preadipocyte differentiation. Calpain activity is required during an early stage of the adipocyte differentiation program. Thus, inhibition of calpain with N-acetyl-Leu-Leu-norleucinal (ALLN) blocks clonal expansion and acquisition of the adipocyte phenotype only when added between 12 and 24 h after the induction of differentiation. Likewise, inhibition of calpain by overexpression of calpastatin, the specific endogenous inhibitor of calpain, prevents 2-day post-confluent preadipocytes from reentering the cell cycle triggered by the differentiation inducers. Inhibition of calpain with ALLN causes preadipocytes to arrest just prior to S phase and prevents phosphorylation of the retinoblastoma gene product, DNA replication, clonal expansion, and subsequent adipocyte differentiation but does not affect the expression of immediate early genes (i.e. fos, jun, C/EBPbeta, and C/EBPdelta). Inhibition of calpain by either ALLN or by overexpression of calpastatin blocks the degradation of p27. p27 is degraded in vitro by cell-free extracts from clonally expanding preadipocytes that contain "active" calpain but not by extracts from pre-mitotic preadipocytes that do not. This action is inhibited by calpastatin or ALLN. Likewise, p27 in preadipocyte extracts is a substrate for purified calpain; this proteolytic action was inhibited by heat inactivation, EGTA, or ALLN. Thus, extracellular signals from the differentiation inducers appear to activate calpain, which degrades p27 allowing density-dependent inhibited preadipocytes to reenter the cell cycle and undergo mitotic clonal expansion.