Activated leukocyte cell adhesion molecule (ALCAM/CD166/MEMD) could function as a cell surface sensor for cell density, controlling the transition between local cell proliferation and tissue invasion in melanoma progression. We have tested the hypothesis that progressive cell clustering controls the proteolytic cascade for activation of gelatinase A/matrix metalloproteinase-2 (MMP-2), which involves formation of an intermediate ternary complex of membrane type 1 MMP (MT1-MMP/MMP-14), tissue inhibitor of metalloproteinase-2 (TIMP-2), and pro-MMP-2 at the cell surface. Surprisingly, truncation of ALCAM severely impaired MMP-2 activation in a nude mouse xenograft model, in which we previously observed diminished primary tumor growth and enhanced melanoma metastasis. Comparative studies of two-dimensional monolayer and three-dimensional collagen-gel cultures revealed that extensive cell-to-cell contacts, wild-type ALCAM, and cell-to-matrix interactions were all indispensable for efficient conversion of pro-MMP-2 to its active form in metastatic melanoma cells. Truncated, dominant-negative ALCAM diminished MMP-2 activation via reduced transcript levels and decreased processing of MT1-MMP. Failure of the proteolytic cascade after selective ALCAM depletion by RNA interference was mainly due to incomplete MT1-MMP processing, which was otherwise promoted by extensive cell-to-cell contacts. These data attribute a novel signaling role to ALCAM in regulation of proteolysis and support its previously postulated sensor function in invasive growth.