Neurofibromatosis type 2 (NF2) is the most commonly mutated gene in benign tumors of the human nervous system such as schwannomas and meningiomas. The NF2 gene encodes a protein called schwannomin or merlin, which is involved in regulating cell growth and proliferation through protein-protein interactions with various cellular proteins. In order to better understand the mechanism by which merlin exerts its function, yeast two-hybrid screening was performed and Ral guanine nucleotide dissociation stimulator (RalGDS), a downstream molecule of Ras, was identified as a merlin-binding protein. The direct interaction between merlin and RalGDS was confirmed both in vitro and in the NIH3T3 cells. The domain analyses revealed that the broad C-terminal region of merlin (aa 141-595) is necessary for the interaction with the C-terminal Ras-binding domain (RBD) of RalGDS. Functional studies showed that merlin inhibits the RalGDS-induced RalA activation, the colony formation and the cell migration in mammalian cells. These results suggest that merlin can function as a tumor suppressor by inhibiting the RalGDS-mediated oncogenic signals.