Membrane type 1 matrix metalloproteinase (MT1-MMP) is a type I transmembrane MMP shown to play a critical role in normal development and in malignant processes. Emerging evidence indicates that MT1-MMP is regulated by a process of ectodomain shedding. Active MT1-MMP undergoes autocatalytic processing on the cell surface, leading to the formation of an inactive 44-kDa fragment and release of the entire catalytic domain. Analysis of the released MT1-MMP forms in various cell types revealed a complex pattern of shedding involving two major fragments of 50 and 18 kDa and two minor species of 56 and 31-35 kDa. Protease inhibitor studies and a catalytically inactive MT1-MMP mutant revealed both autocatalytic (18 kDa) and non-autocatalytic (56, 50, and 31-35 kDa) shedding mechanisms. Purification and sequencing of the 18-kDa fragment indicated that it extends from Tyr(112) to Ala(255). Structural and sequencing data indicate that shedding of the 18-kDa fragment is initiated at the Gly(284)-Gly(285) site, followed by cleavage between the conserved Ala(255) and Ile(256) residues near the conserved methionine turn, a structural feature of the catalytic domain of all MMPs. Consistently, a recombinant 18-kDa fragment had no catalytic activity and did not bind TIMP-2. Thus, autocatalytic shedding evolved as a specific mechanism to terminate MT1-MMP activity on the cell surface by disrupting enzyme integrity at a vital structural site. In contrast, functional data suggest that the non-autocatalytic shedding generates soluble active MT1-MMP species capable of binding TIMP-2. These studies suggest that ectodomain shedding regulates the pericellular and extracellular activities of MT1-MMP through a delicate balance of active and inactive enzyme-soluble fragments.