The role of cysteinylglycine S-conjugate dipeptidases in the intrahepatic mercapturic acid pathway was investigated in rat liver. Subcellular compartmentation studies and liver perfusions were performed using monochlorobimane and bimane S-conjugates as model compounds. The major part (over 95%) of total hepatic cysteinylglycine S-conjugate dipeptidase activity was located in the cytosol. Lower specific activity appeared in the canalicular plasma membrane fraction. Similar hepatic localization of dipeptidase activity was seen in the guinea pig. In intact rat liver perfused with monochlorobimane, the major products were the glutathione S-conjugate (mBSG) and the cysteinylglycine S-conjugate (mBCG) in bile. Minor amounts of the cysteine S-conjugate (mBCys) and the mercapturic acid (mBNAc) were formed, indicating a limitation in further metabolism of the dipeptide S-conjugate in the biliary space. However, when the dipeptide S-conjugate was offered to the sinusoidal space in liver perfusions, substantial uptake and conversion to mBNAc was observed, and only trace amounts of the infused dipeptide appeared in bile. The data suggest that cytosolic cysteinylglycine S-conjugate dipeptidase as identified here is involved in hepatic mercapturic acid formation from sinusoidal cysteinylglycine S-conjugates. This is especially of significance for species such as guinea pig and human, in which dipeptide S-conjugates are generated in the sinusoidal domain of the liver due to the presence of high gamma-glutamyltranspeptidase activity.