Complete maturation of hepatitis C virus (HCV) core protein requires coordinate cleavage by signal peptidase and an intramembrane protease, signal peptide peptidase. We show that reducing the intracellular levels of signal peptide peptidase lowers the titer of infectious virus released from cells, indicating that it plays an important role in virus production. Proteolysis by the enzyme at a signal peptide between core and the E1 glycoprotein is needed to permit targeting of core to lipid droplets. From mutagenesis studies, introducing mutations into the core-E1 signal peptide delayed the appearance of signal peptide peptidase-processed core until between 48 and 72 h after the beginning of the infectious cycle. Accumulation of mature core at these times coincided with its localization to lipid droplets and a rise in titer of infectious HCV. Therefore, processing of core by signal peptide peptidase is a critical event in the virus life cycle. To study the stage in virus production that may be blocked by interfering with intramembrane cleavage of core, we examined the distribution of viral RNA in cells harboring the core-E1 signal peptide mutant. Results revealed that colocalization of core with HCV RNA required processing of the protein by signal peptide peptidase. Our findings provide new insights into the sequence requirements for proteolysis by signal peptide peptidase. Moreover, they offer compelling evidence for a function for an intramembrane protease to facilitate the association of core with viral genomes, thereby creating putative sites for assembly of nascent virus particles.