Preadipocyte factor 1 (Pref-1), an epidermal growth factor repeat containing transmembrane protein found in the preadipocytes, inhibits adipocyte differentiation in vitro and in vivo. Here, we examined the processing of membrane form of Pref-1A to release the 50-kDa soluble form that inhibits adipocyte differentiation. The ectodomain cleavage of Pref-1 is markedly enhanced by phorbol 12-myristate 13-acetate in a dose- and time-dependent manner. The basal and stimulated cleavage is inhibited by the broad metalloproteinase inhibitor GM6001, a fact that suggests that cleavage of membrane Pref-1A is dependent on a metalloproteinase. Next, we showed that release of soluble Pref-1A is inhibited by TAPI-0 and by a tissue inhibitor of metalloproteinase-3, TIMP-3, that can inhibit tumor necrosis factor alpha converting enzyme (TACE), but not by TIMP-1 or TIMP-2. On the other hand, overexpression of TACE increases Pref-1 cleavage to produce the 50-kDa soluble form. Furthermore, this cleavage was not detected in cells with TACE mutation or with TACE small interfering RNA. TACE-mediated shedding of Pref-1 ectodomain inhibits adipocyte differentiation of 3T3-L1 cells and in Pref-1-null mouse embryo fibroblasts transduced with Pref-1A. Identification of TACE as the major protease responsible for conversion of membrane-bound Pref-1 to the biologically active diffusible form provides a new insight into Pref-1 function in adipocyte differentiation.