The shedding of membrane-associated proteins has been recognized as a regulatory mechanism to either up-regulate or down-regulate cellular functions by releasing membrane-bound growth factors or removing ectodomains of adhesion molecules and receptors. We have reported previously that the ectoenzyme of membrane type matrix metalloproteinase 5 (MT5-MMP) is shed into extracellular milieu (Pei, D. (1999) J. Biol. Chem. 274, 8925-8932). Here we present evidence that MT5-MMP is shed by a furin-type convertase activity in the trans-Golgi network. Among proteinase inhibitors screened, only decanoyl-Arg-Val-Lys-Arg-chloromethylketone, a known inhibitor for furin-type convertases, blocked the shedding of MT5-MMP in a dose-dependent manner. As expected, decanoyl-Arg-Val-Lys-Arg-chloromethylketone also prevented the activation of MT5-MMP, raising the possibility that the observed shedding could be autolytic. However, an active site mutant devoid of any catalytic activity, is also shed efficiently, thus ruling out the autolytic pathway. The shedding cleavage was subsequently mapped to the stem region immediately upstream of the transmembrane domain, where a cryptic furin recognition site, (545)RRKERR, was recognized. Indeed, MT5-MMP and furin are co-localized in the trans-Golgi network and the shed species could be detected inside the cells. Furthermore, deletion mutations removing this cryptic site prevented MT5-MMP from shedding. The resulting mutants express a gain-of-function phenotype by mediating more robust activation of proMMP-2 than the wild type molecule. Thus, shedding provides a potential mechanism to regulate proteolytic activity of membrane-bound MMPs.