The submandibular gland (SMG) develops through the epithelial-mesenchymal interaction mediated by many growth/differentiation factors including activin and BMPs, which are synthesized as inactive precursors and activated by subtilisin-like proprotein convertases (SPC) following cleavage at their R-X-K/R-R site. Here, we found that Dec-RVKR-CMK, a potent inhibitor of SPC, inhibited the branching morphogenesis of the rat embryonic SMG, and caused low expression of a water channel AQP5, in an organ culture system. Dec-RVKR-CMK also decreased the expression of PACE4, a SPC member, but not furin, another SPC member, suggesting the involvement of PACE4 in the SMG development. Heparin, which is known to translocate PACE4 in the extracellular matrix into the medium, and an antibody specific for the catalytic domain of PACE4, both reduced the branching morphogenesis and AQP5 expression in the SMG. The inhibitory effects of Dec-RVKR-CMK were partially rescued by the addition of recombinant BMP2, whose precursor is one of the candidate substrates for PACE4 in vivo. Further, the suppression of PACE4 expression by siRNAs resulted in decreased expression of AQP5 and inhibition of the branching morphogenesis in the present organ culture system. These observations suggest that PACE4 regulates the SMG development via the activation of some growth/differentiation factors.