Familial Alzheimer's disease mutations inhibit gamma-secretase-mediated liberation of beta-amyloid precursor protein carboxy-terminal fragment. Cleavage of the beta-secretase processed beta-amyloid precursor protein by gamma-secretase leads to the extracellular release of Abeta42, the more amyloidogenic form of the beta-amyloid peptide, which subsequently forms the amyloid-plaques diagnostic of Alzheimer's disease. Mutations in beta-amyloid precursor protein (APP), presenilin-1 and presenilin-2 associated with familial Alzheimer's disease (FAD) increase release of Abeta42, suggesting that FAD may directly result from increased gamma-secretase activity. Here, we show that familial Alzheimer's disease mutations clustered near the sites of gamma-secretase cleavage actually decrease gamma-secretase-mediated release of the intracellular fragment of APP (CTFgamma). Concordantly, presenilin-1 mutations that result in Alzheimer's disease also decrease the release of CTFgamma. Mutagenesis of the epsilon cleavage site in APP mimicked the effects of the FAD mutations, both decreasing CTFgamma release and increasing Abeta42 production, suggesting that perturbation of this site may account for the observed decrement in gamma-secretase-mediated proteolysis of APP. As CTFgamma has been implicated in transcriptional activation, these data indicate that decreased signaling and transcriptional regulation resulting from FAD mutations in beta-amyloid precursor protein and presenilin-1 may contribute to the pathology of Alzheimer's disease.