In most cases, the transcriptional factor NF-κB is a heterodimer consisting of two subunits, p50 and p65, which are encoded by two distinct genes of the Rel family. p50 is translated as a precursor of 105 kDa. The C- terminal domain of the precursor is rapidly degraded, forming the mature p50 subunit consisted of the N-terminal region of the molecule. The mechanism of generation of p50 is not known. It has been suggested that the ubiquitin- proteasome system is involved in the process; however, the specific enzymes involved and the mechanism of limited proteolysis, in which half of the molecule is spared, have been obscure. Palombella and colleagues (Palombella, V. J., Rando, O. J., Goldberg, A. L., and Maniatis, T. (1994) Cell 78, 773- 785) have shown that ubiquitin is required for the processing in a cell-free system of a truncated, artificially constructed, 60-kDa precursor. They have also shown that proteasome inhibitors block the processing both in vitro and in vivo. In this study, we demonstrate reconstitution of a cell-free processing system and demonstrate directly that: (a) the ubiquitin-proteasome system is involved in processing of the intact p105 precursor, (b) conjugation of ubiquitin to the precursor is an essential intermediate step in the processing, (c) the recently discovered novel species of the ubiquitin-carrier protein, E2-F1, that is involved in the conjugation and degradation of p53, is also required for the limited processing of the p105 precursor, and (d) a novel, ~320-kDa species of ubiquitin-protein ligase, is involved in the process. This novel enzyme is distinct from E6-AP, the p53- conjugating ligase, and from E3α, the 'N-end rule' ligase.