Intramembrane proteases control many important processes in a wide variety of organisms through regulated intramembrane proteolysis (RIP). However, very few intramembrane proteases have been characterized in plants. Intriguingly, EGY2 in Arabidopsis belongs to the Site-2 protease (S2P) family that performs RIP. It contains the conserved catalytic motifs, HExxH and NPDG on its multiple transmembrane helices. Four egy2 knockout mutants have significantly shorter hypocotyls and accumulate lower levels of fatty acids in seedlings. Accumulation of fatty acid biosynthesis enzymes in seedlings are also decreased in egy2 knockout mutants. EGY2 protein resides in the chloroplast and EGY2 transcripts are found throughout the plant except root. Recombinant EGY2 protein cleaves β-casein in an ATP-independent manner. These results together suggest that EGY2 metalloprotease plays a role in hypocotyl elongation likely through a RIP dependent process to regulate the coordinated expression of nuclear- and plastid-encoded genes.