Gamma-secretase is an enzyme complex that mediates both Notch signaling and beta-amyloid precursor protein (APP) processing, resulting in the generation of Notch intracellular domain, APP intracellular domain, and the amyloid beta peptide (Abeta), the latter playing a central role in Alzheimer disease (AD). By a hitherto undefined mechanism, the activity of gamma-secretase gives rise to Abeta peptides of different lengths, where Abeta42 is considered to play a particular role in AD. In this study we have examined the role of the large hydrophilic loop (amino acids 320-374, encoded by exon 10) of presenilin 1 (PS1), the catalytic subunit of gamma-secretase, for gamma-secretase complex formation and activity on Notch and APP processing. Deletion of exon 10 resulted in impaired PS1 endoproteolysis, gamma-secretase complex formation, and had a differential effect on Abeta-peptide production. Although the production of Abeta38, Abeta39, and Abeta40 was severely impaired, the effect on Abeta42 was affected to a lesser extent, implying that the production of the AD-related Abeta42 peptide is separate from the production of the Abeta38, Abeta39, and Abeta40 peptides. Interestingly, formation of the intracellular domains of both APP and Notch was intact, implying a differential cleavage activity between the epsilon/S3 and gamma sites. The most C-terminal amino acids of the hydrophilic loop were important for regulating APP processing. In summary, the large hydrophilic loop of PS1 appears to differentially regulate the relative production of different Abeta peptides without affecting Notch processing, two parameters of significance when considering gamma-secretase as a target for pharmaceutical intervention in AD.