We demonstrate an essential role for the proteasome complex in two proteolytic processes required for activation of the transcription factor NF-kappa B. The p105 precursor of the p50 subunit of NF-kappa B is processed in vitro by an ATP-dependent process that requires proteasomes and ubiquitin conjugation. The C-terminal region of p105 is rapidly degraded, leaving the N-terminal p50 domain. p105 processing can be blocked in intact cells with inhibitors of the proteasome or in yeast with proteasome mutants. These inhibitors also block the activation of NF-kappa B and the rapid degradation of I kappa B alpha induced by tumor necrosis factor alpha. Thus, the ubiquitin-proteasome pathway functions not only in the complete degradation of polypeptides, but also in the regulated processing of precursors into active proteins.