Fibroblast growth factor (FGF) receptors (FGFRs) are membrane-spanning tyrosine kinase receptors that mediate regulatory signals for cell proliferation and differentiation in response to FGFs. We have previously determined that the Lys650-->Glu mutation in the activation loop of the kinase domain of FGFR3, which is responsible for the lethal skeletal dysplasia thanatophoric dyplasia type II (TDII), greatly enhances the ligand-independent kinase activity of the receptor. Here, we demonstrate that expression of this construct induces a c-fos promoter construct approximately 10-fold but does not lead to proliferation or morphological transformation of NIH 3T3 cells. In contrast, the isolated kinase domain of activated FGFR3, targeted to the plasma membrane by a myristylation signal, is able to stimulate c-fos expression by 40-fold, induce proliferation of quiescent cells, and morphologically transform fibroblasts. This result suggests that the extracellular and transmembrane domains of FGFRs exert a negative regulatory influence on the activity of the kinase domain. Targeting of the activated kinase domain to either the cytoplasm or the nucleus does not significantly affect biological signaling, suggesting that signals from FGFR3 resulting in mitogenesis originate exclusively from the plasma membrane. Furthermore, our novel observation that expression of a highly activated FGFR3 kinase domain is able to morphologically transform fibroblasts suggests that dysregulation of FGFR3 has the potential to play a role in human neoplasia.