Subunit 9 (dicyclohexylcarbodiimide binding protein, 'proteolipid') of the mitochondrial F1F0-ATPase is a nuclearly coded protein in Neurospora crassa. It is synthesized on free cytoplasmic ribosomes as a larger precursor with an NH2-terminal peptide extension. The peptide extension is cleaved off after transport of the protein into the mitochondria. A processing activity referred to as processing peptidase that cleaves the precursor to subunit 9 and other mitochondrial proteins is described and characterized using a cell-free system. Precursor synthesized in vitro was incubated with extracts of mitochondria. Processing peptidase required Mn2+ for its activity. Localization studies suggested that it is a soluble component of the mitochondrial matrix. The precursor was cleaved in two sequential steps via an intermediate-sized polypeptide. The intermediate form in the processing of subunit 9 was also seen in vivo and upon import of the precursor into isolated mitochondria in vitro. The two cleavage sites in the precursor molecule were determined. The data indicate that: (a) the correct NH2-terminus of the mature protein was generated, (b) the NH2-terminal amino acid of the intermediate-sized polypeptide is isoleucine in position-31. The cleavage sites show similarity of primary structure. It is concluded that processing peptidase removes the peptide extension from the precursor to subunit 9 (and probably other precursors) after translocation of these polypeptides (or the NH2-terminal part of these polypeptides) into the matrix space of mitochondria.