The tumor suppressor p53 is a transcription factor that regulates the expression of a range of target genes in response to cellular stress. Adding to the complexity of understanding its cellular function is that in addition to the full-length protein, several p53 isoforms are produced in humans, harboring diverse expression patterns and functionalities. One isoform, Δ40p53, which lacks the first transactivation domain including the binding region for the negative regulator MDM2, was shown to be a product of alternative translation initiation. Here we report the discovery of an alternative cellular mechanism for Δ40p53 formation. We show that the 20S proteasome specifically cleaves the full-length protein (FLp53) to generate the Δ40p53 isoform. Moreover, we demonstrate that a dimer of FLp53 interacts with a Δ40p53 dimer, creating a functional hetero-tetramer. Consequently, the co-expression of both isoforms attenuates the transcriptional activity of FLp53 in a dominant negative manner. Finally, we demonstrate that following oxidative stress, at the time when the 20S proteasome becomes the major degradation machinery and FLp53 is activated, the formation of Δ40p53 is enhanced, creating a negative feedback loop that balances FLp53 activation. Overall, our results suggest that Δ40p53 can be generated by a 20S proteasome-mediated post-translational mechanism so as to control p53 function. More generally, the discovery of a specific cleavage function for the 20S proteasome may represent a more general cellular regulatory mechanism to produce proteins with distinct functional properties.