Human leukocyte antigen DM (HLA-DM) molecules are structurally related to classical MHC class II molecules and reside in the lysosomallke compartment where class II-restricted antigen processing Is thought to occur. Yutsnt cell lines tacking HLA-DM ere defective In antigen processing and accumulate cuss II molecules associated wlth a nested set of invariant chain-derived peptkfes (clsas II-sssoctated InvarIant chain pepWe& CLIP). Here we show thst HLA-DM cstalyxes the dlssoelation of CLIP from MHC class II-CLIP complexes In vitro and facilitates the binding of antigenic peptides. The reactlon has an acidic pH optimum, consistent with its occurrence In a lysosome-like compartment in vivo. Antibody blocking experiments suggest that a transient interaction between HLA-DM and the MHC class II-CLIP complex is required.