Giardia is a flagellated protozoan that resides in the upper small intestine of its vertebrate host and is the most common cause of defined waterborne diarrhoea worldwide. Giardia trophozoites undergo significant biological changes to survive outside the host by differentiating into infective cysts. Encystation is thus essential for transmission of the parasite among susceptible hosts. In the present study, we report that bestatin, a competitive inhibitor of aminopeptidases, blocks cyst formation in vitro by abolishing the expression of encystation-specific genes, such as those coding for cyst wall proteins. Bestatin does not affect proliferating trophozoites, indicating that its effect is encystation-specific. Using biochemical and molecular biological approaches, we identified the enzyme inhibited by bestatin and cloned its corresponding gene. Sequence similarity indicated that this enzyme belongs to a family of dipeptidyl peptidases. Our results suggest that a specific proteolytic event caused by a constitutively expressed membrane-associated dipeptidyl peptidase IV is necessary for encystation of Giardia.