The level of conservation between two homologous sequences often varies among sequence regions; functionally important domains are more conserved than the remaining regions. Thus, multiple parameter sets should be used in alignment of homologous sequences with a stringent parameter set for highly conserved regions and a moderate parameter set for weakly conserved regions. We describe an alignment algorithm to allow dynamic use of multiple parameter sets with different levels of stringency in computation of an optimal alignment of two sequences. The algorithm dynamically considers various candidate alignments, partitions each candidate alignment into sections, and determines the most appropriate set of parameter values for each section of the alignment. The algorithm and its local alignment version are implemented in a computer program named GAP4. The local alignment algorithm in GAP4, that in its predecessor GAP3, and an ordinary local alignment program SIM were evaluated on 257 716 pairs of homologous sequences from 100 protein families. On 168 475 of the 257 716 pairs (a rate of 65.4%), alignments from GAP4 were more statistically significant than alignments from GAP3 and SIM.