We have studied the intracellular processing of insulin in the rat hepatoma cell line Fao. Fao cells internalized cohorts of surface-bound 125I-insulin or 125I-insulin-like growth factor II within 3-5 min. Degraded 125I-insulin-like growth factor II did not appear in the medium until 20-30 min after uptake, consistent with a time course of lysosomal delivery. In contrast, internalized insulin was completely degraded within 7-10 min. The half-times for dissociation and degradation of internalized insulin were identical at 37 degrees C (3 min), suggesting that the two processes occurred in the same compartment. Subcellular fractionation of Fao cells showed that a pulse of internalized insulin was largely intact after 3 min and associated with a light membrane fraction devoid of lysosomal markers. After an additional 4 min, the amount of insulin in this compartment decreased by 40%, with an increase in degraded insulin in the cytosol; no transfer of intact insulin to lysosomes or the cytosol was detected. The relationship between insulin-receptor dissociation and insulin degradation was further studied with inhibitors of insulin processing. Monensin blocked both dissociation and degradation of internalized insulin, as did incubation of the cells at 20 degrees C, suggesting that both endosomal acidification and endosomal fusion were required for insulin processing. At 25 degrees C, dissociation (+ t 1/2 = 12.9 min) preceded degradation (+ t 1/2 = 15.8 min). Inhibitors of lysosomal proteases were without effect on the half-time for either process. In contrast, bacitracin, an inhibitor of insulin degradation, caused a 2-fold increase in the half-times for both dissociation and degradation. Thus, intracellular insulin dissociation and degradation are tightly coupled endosomal processes in Fao cells, and insulin degradation facilitates the dissociation of insulin from its receptor inside the cell.