Hepatitis C virus (HCV) core protein has shown to be localized in the detergent-resistant membrane (DRM), which is distinct from the classical raft fraction including caveolin, although the biological significance of the DRM localization of the core protein has not been determined. The HCV core protein is cleaved off from a precursor polyprotein at the lumen side of Ala(191) by signal peptidase and is then further processed by signal peptide peptidase (SPP) within the transmembrane region. In this study, we examined the role of SPP in the localization of the HCV core protein in the DRM and in viral propagation. The C terminus of the HCV core protein cleaved by SPP in 293T cells was identified as Phe(177) by mass spectrometry. Mutations introduced into two residues (Ile(176) and Phe(177)) upstream of the cleavage site of the core protein abrogated processing by SPP and localization in the DRM fraction. Expression of a dominant-negative SPP or treatment with an SPP inhibitor, L685,458, resulted in reductions in the levels of processed core protein localized in the DRM fraction. The production of HCV RNA in cells persistently infected with strain JFH-1 was impaired by treatment with the SPP inhibitor. Furthermore, mutant JFH-1 viruses bearing SPP-resistant mutations in the core protein failed to propagate in a permissive cell line. These results suggest that intramembrane processing of HCV core protein by SPP is required for the localization of the HCV core protein in the DRM and for viral propagation.