Post-translational modifications of the extracellular matrix receptor dystroglycan (DG) determine its functional state, and defects in these modifications are linked to muscular dystrophies and cancers. A prominent feature of DG biosynthesis is a precursor cleavage that segregates the ligand-binding and transmembrane domains into the noncovalently attached alpha- and beta-subunits. We investigate here the structural determinants and functional significance of this cleavage. We show that cleavage of DG elicits a conspicuous change in its ligand-binding activity. Mutations that obstruct this cleavage result in increased capacity to bind laminin, in part, due to enhanced glycosylation of alpha-DG. Reconstitution of DG cleavage in a cell-free expression system demonstrates that cleavage takes place in the endoplasmic reticulum, providing a suitable regulatory point for later processing events. Sequence and mutational analyses reveal that the cleavage occurs within a full SEA (sea urchin, enterokinase, agrin) module with traits matching those ascribed to autoproteolysis. Thus, cleavage of DG constitutes a control point for the modulation of its ligand-binding properties, with therapeutic implications for muscular dystrophies. We provide a structural model for the cleavage domain that is validated by experimental analysis and discuss this cleavage in the context of mucin protein and SEA domain evolution.