In the murine leukemia viruses (MuLVs), the Env complex is initially cleaved by a cellular protease into gp70SU and pre15ETM. After the virus particle is released from the cell, the C-terminal 16 residues are removed from the cytoplasmic domain of pre15E by the viral protease, yielding the mature p15ETM and p2E. We have investigated the function of this cleavage by generating a Moloney MuLV mutant, termed p2E-, in which the Env coding region terminates at the cleavage site. This mutant synthesizes only the truncated, mature form of TM rather than its extended precursor. When cells expressing this truncated Env protein are cocultivated with NIH 3T3 cells, they induce rapid cell-cell fusion. Thus, the truncated form, which is normally found in virions but not in virus-producing cells, is capable of causing membrane fusion. We conclude that the 16-residue p2E tail inhibits this activity of Env until the virus has left the cell. p2E- virions were found to be infectious, though with a lower specific infectivity than that of the wild type, showing that p2E does not play an essential role in the process of infection. Fusion was also observed with a chimeric p2E- virus in which gp70SU and nearly all of p15ETM are derived from amphotropic, rather than Moloney, MuLV. In a second mutant, an amino acid at the cleavage site was changed. The pre15E protein in this mutant is not cleaved. While the mutant Env complex is incorporated into virions, these particles have a very low specific infectivity. This result suggests that the cleavage event is essential for infectivity, in agreement with the idea that removal of p2E activates the membrane fusion capability of the Env complex.