Neuropeptide Y (NPY) functions as a peptide neurotransmitter and as a neuroendocrine hormone. The active NPY peptide is generated in secretory vesicles by proteolytic processing of proNPY. Novel findings from this study show that cathepsin L participates as a key proteolytic enzyme for NPY production in secretory vesicles. Notably, NPY levels in cathepsin L knockout (KO) mice were substantially reduced in brain and adrenal medulla by 80% and 90%, respectively. Participation of cathepsin L in producing NPY predicts their colocalization in secretory vesicles, a primary site of NPY production. Indeed, cathepsin L was colocalized with NPY in brain cortical neurons and in chromaffin cells of adrenal medulla, demonstrated by immunofluorescence confocal microscopy. Immunoelectron microscopy confirmed the localization of cathepsin L with NPY in regulated secretory vesicles of chromaffin cells. Functional studies showed that coexpression of proNPY with cathepsin L in neuroendocrine PC12 cells resulted in increased production of NPY. Furthermore, in vitro processing indicated cathepsin L processing of proNPY at paired basic residues. These findings demonstrate a role for cathepsin L in the production of NPY from its proNPY precursor. These studies illustrate the novel biological role of cathepsin L in the production of NPY, a peptide neurotransmitter, and neuroendocrine hormone.