The cleavage of Notch by presenilin (PS)/gamma-secretase is a salient example of regulated intramembrane proteolysis, an unusual mechanism of signal transduction. This cleavage is preceded by the binding of protein ligands to the Notch ectodomain, activating its shedding. We hypothesized that the Notch ligands, Delta and Jagged, themselves undergo PS-mediated regulated intramembrane proteolysis. Here, we show that the ectodomain of mammalian Jagged is cleaved by an A disintegrin and metalloprotease (ADAM) 17-like activity in cultured cells and in vivo, similar to the known cleavage of Drosophila Delta by Kuzbanian. The ectodomain shedding of ligand can be stimulated by Notch and yields membrane-tethered C-terminal fragments (CTFs) of Jagged and Delta that accumulate in cells expressing a dominant-negative form of PS or treated with gamma-secretase inhibitors. PS forms stable complexes with Delta and Jagged and with their respective CTFs. PS/gamma-secretase then mediates the cleavage of the latter to release the Delta and Jagged intracellular domains, a portion of which can enter the nucleus. The ligand CTFs compete with an activated form of Notch for cleavage by gamma-secretase and can thus inhibit Notch signaling in vitro. The soluble Jagged intracellular domain can activate gene expression via the transcription factor AP1, and this effect is counteracted by the co-expression of the gamma-secretase-cleaved product of Notch, Notch intracellular domain. We conclude that Delta and Jagged undergo ADAM-mediated ectodomain processing followed by PS-mediated intramembrane proteolysis to release signaling fragments. Thus, Notch and its cognate ligands are processed by the same molecular machinery and may antagonistically regulate each other's signaling.