Controlled release of membrane-tethered, dormant precursors is an intriguing activation mechanism that regulates diverse cellular functions in eukaryotes. An exquisite example is the proteolytic activation of membrane-bound transcription factors. The proteolytic cleavage liberates active transcription factors from the membranes that can enter the nucleus and evokes rapid transcriptional responses to incoming stimuli. Here, we show that a membrane-bound NAC (for NAM, ATAF1/2, CUC2) transcription factor, designated NTM1 (for NAC with transmembrane motif1), is activated by proteolytic cleavage through regulated intramembrane proteolysis and mediates cytokinin signaling during cell division in Arabidopsis thaliana. Cell proliferation was greatly reduced in an Arabidopsis mutant with retarded growth and serrated leaves in which a transcriptionally active NTM1 form was constitutively expressed. Accordingly, a subset of cyclin-dependent kinase (CDK) inhibitor genes (the KIP-related proteins) was induced in this mutant with a significant reduction in histone H4 gene expression and in CDK activity. Consistent with a role for NTM1 in cell cycling, a Ds element insertional mutant was morphologically normal but displayed enhanced hypocotyl growth with accelerated cell division. Interestingly, cytokinins were found to regulate NTM1 activity by controlling its stability. These results indicate that the membrane-mediated activation of NTM1 defines a molecular mechanism by which cytokinin signaling is tightly regulated during cell cycling.