A novel cleavage of beta-amyloid precursor protein (APP), referred to as epsilon-cleavage, occurs downstream of the gamma-cleavage and generates predominantly a C-terminal fragment (CTFgamma) that begins at Val-50, according to amyloid beta-protein (Abeta) numbering. Whether this cleavage occurs independently of, or is coordinated with, gamma-cleavage is unknown. Using a cell-free system, we show here that, although Abeta40 and CTFgamma 50-99 were the predominant species produced by membranes prepared from cells overexpressing wild-type (wt) APP and wt presenilin (PS) 1 or 2, the production of CTFgamma 49-99, which begins at Leu-49, was remarkably enhanced in membranes from cells overexpressing mutant (mt) APP or mtPS1/2 that increases the production of Abeta42. Furthermore, a gamma-secretase inhibitor, which suppresses Abeta40 production and paradoxically enhances Abeta42 production at low concentrations, caused the proportion of CTFgamma 50-99 to decrease and that of CTFgamma 49-99 to increase significantly. These results strongly suggest a link between the production of Abeta42 and CTFgamma 49-99 and provide an important insight into the mechanisms of altered gamma-cleavage caused by mtAPP and mtPS1/2.