The mechanism of inactivation of serine proteases by N-peptidyl-O-aroylhydroxylamines was studied by X-ray crystallography. Cocrystals of subtilisin Carlsberg inactivated with N-((tert-butoxy-carbonyl)alanylprolyphenylalanyl)-O-nitrobenzoylhydroxylamine were grown, and diffraction data to 1.8-Angstrom resolution were obtained. The resulting electron density maps clearly reveal that the gamma-oxygen of the catalytic serine forms a carbamate derivative with the inhibitor. The peptide part of the inhibitor does not form the usual antiparallel beta-sheet in the P binding cleft but protrudes out of the active site and is stabilized by a network of water molecules. These results, combined with kinetic characterization reported previously [Demuth, H.-U., Schoenlein, C., & Barth, A. (1989b) Biochim. Biophys. Acta 996, 19-22; Schmidt, C., Schmidt, R., & Demuth, H.-U. (1990) Peptides (Giralt, E., & Andreu, D., Eds.) ESCOM Science Publishers B.V., Amsterdam] support the existence of at least one intermediate between the formation of the Michaelis complex and the final product. We suggest a mechanism for the inactivation of subtilisin Carlsberg by N-((tert-butoxycarbonyl)alanylprolylphenylalanyl)-O-benzoylydroxylamine whereby a negatively charged Michaelis complex undergoes a Lossen rearrangement giving rise to an isocyanate intermediate that reacts with the side chain of the active site serine.