GSH metabolism in yeast is carried out by the gamma-glutamyl cycle as well as by the DUG complex. One of the last steps in the gamma-glutamyl cycle is the cleavage of Cys-Gly by a peptidase to the constitutent amino acids. Saccharomyces cerevisiae extracts carry Cys-Gly dipeptidase activity, but the corresponding gene has not yet been identified. We describe the isolation and characterization of a novel Cys-Gly dipeptidase, encoded by the DUG1 gene. Dug1p had previously been identified as part of the Dug1p-Dug2p-Dug3p complex that operates as an alternate GSH degradation pathway and has also been suggested to function as a possible di- or tripeptidase based on genetic studies. We show here that Dug1p is a homodimer that can also function in a Dug2-Dug3-independent manner as a dipeptidase with high specificity for Cys-Gly and no activity toward tri- or tetrapeptides in vitro. This activity requires zinc or manganese ions. Yeast cells lacking Dug1p (dug1Delta) accumulate Cys-Gly. Unlike all other Cys-Gly peptidases, which are members of the metallopeptidase M17, M19, or M1 families, Dug1p is the first to belong to the M20A family. We also show that the Dug1p Schizosaccharomyces pombe orthologue functions as the exclusive Cys-Gly peptidase in this organism. The human orthologue CNDP2 also displays Cys-Gly peptidase activity, as seen by complementation of the dug1Delta mutant and by biochemical characterization, which revealed a high substrate specificity and affinity for Cys-Gly. The results indicate that the Dug1p family represents a novel class of Cys-Gly dipeptidases.