Mice homozygous for the fat mutation develop obesity and hyperglycaemia that can be suppressed by treatment with exogenous insulin. The fat mutation maps to mouse chromosome 8, very close to the gene for carboxypeptidase E (Cpe), which encodes an enzyme (CPE) that processes prohormone intermediates such as proinsulin. We now demonstrate a defect in proinsulin processing associated with the virtual absence of CPE activity in extracts of fat/fat pancreatic islets and pituitaries. A single Ser202Pro mutation distinguishes the mutant Cpe allele, and abolishes enzymatic activity in vitro. Thus, the fat mutation represents the first demonstration of an obesity-diabetes syndrome elicited by a genetic defect in a prohormone processing pathway.