A selective bi-directional peptide bond cleavage mediated by N-methylcysteine (MeCys) in Xaa-MeCys-Yaa peptides (Xaa and Yaa, non-cysteine residues) leading to thioesters and thiolactones is described. Rate and product analyses showed that an Nα-amide bond cleavage occurred at the Xaa-MeCys bond by an N–S acyl shift to generate an Xaa-S-(MeCys-Yaa) thioester at pH 1–5, whereas under strongly acidic conditions of H0 = –5, the MeCys-Yaa bond underwent a Cα-amide bond cleavage via an oxazolone intermediate, which was trapped by thiocresol (TC) as an Xaa-MeCys-TC thioester. This thioester was then transformed into an Xaa-MeCys-β-thiolactone at pH 4–5. Replacing MeCys by a Cys residue did not result in significant bi-directional peptide bond cleavage, which suggests that N-methylation in a MeCys residue is important for the N–S acyl shift reaction and formation of oxazolone. The isomerization of amides and thioesters was successfully used to prepare cyclic peptides.