Matrix metalloproteinase-7 (matrilysin, MMP-7) expression is increased in epithelium by bacterial infection, inflammation, fibrosis, and in a myriad of carcinomas. It functions to degrade extracellular matrix and other pericellular substrates including the adherens junction protein E-cadherin to promote wound healing and tissue remodeling. β-catenin functions as both a structural component of adherens junctions and as an intracellular signaling molecule. To assess if matrilysin-mediated disassembly of adherens junctions regulates β-catenin function, we assessed effects of matrilysin catalytic activity on β-catenin localization and signaling activity in A549 cells and in bleomycin-induced lung injury in mice. We determined that matrilysin activity releases β-catenin from the cell membrane after which it is degraded in the cytosol. However, in the presence of a β-catenin stabilizing Wnt signal, β-catenin accumulated in the cytosol and activated a β-catenin luciferase promoter. Furthermore, β-catenin nuclear translocation and activation was impaired in matrilysin-null mice when compared to wild-type mice after bleomycin-induced lung injury. These results show identify matrilysin as a regulator of β-catenin function in injured lung epithelium and may link extracellular proteolytic activity to cell junction disassembly and intracellular signaling.