The X-ray structure of m-calpain shows that domain III of the large subunit is structurally related to C2 domains, Ca2+-regulated lipid binding modules in many enzymes. To address whether this structural similarity entails functional analogy, we have characterized recombinant domain III from rat mu- and m-calpain and Drosophila CALPB, In a Ca2+ overlay assay domain III displays a large capacity for Ca2+ binding, commensurable with that of domain IV, the principal Ca2+-binding domain of calpains, The amount of Ca2+ bound to domain III increases 2- to 10-fold upon the addition of liposomes containing 20-40% di- and triphosphoinositides. Conversely, phospholipid-binding in spin-column size-exclusion chromatography is significantly promoted by Ca2+, in a manner similar to known C2 domains. These results suggest that domain III might be the primary lipid binding site of calpain and may play a decisive role in orchestrating Ca2+- and lipid activation of the enzyme.