Hematopoietic cytokine receptor signaling involves activation of signal transducer and activator of transcription (STAT) proteins that are thought to control cellular differentiation. Truncated STAT isoforms (beta forms, rather than the normal alpha forms) have been described and found to block the normal signaling function of the alpha isoforms. We recently demonstrated STATbeta isoforms in bone marrow samples from 21 of 27 (78%) acute myeloid leukemia (AML) patients. We sought to determine the mechanism by which the STATbeta forms were generated. Samples from eight newly diagnosed AML patients were studied; four expressed predominantly STATalpha, and four expressed predominantly STATbeta. The reverse transcription-PCR generated identical products in the two groups, suggesting that alternate mRNA splicing is not responsible for the genesis of STATbeta. Extracts from cells expressing predominantly STATbeta incubated with cell extracts from the MO7E cell line, which expresses predominantly STATa, caused a decrease of the alpha isoforms and an increase of the beta isoforms, suggesting the presence of proteolytic activity. This proteolytic activity was: (a) specific for STAT3 and STAT5, but not for STAT6; (b) serine dependent; (c) equally present in nuclear and cytoplasmic fractions of the leukemic blasts; and (d) different than the activity detected in a murine hematopoietic cell line. The cleaved beta isoforms retained their DNA-binding activity. Because expression of truncated STATs may be involved in blocking differentiation of AML blasts, elucidation of the regulation of the proteolytic activity may contribute to our understanding of leukemogenesis.