Heparin-binding epidermal growth factor-like growth factor (HB-EGF) is synthesized as a membrane-anchored precursor that is cleaved to release the soluble mature growth factor. The two forms are active as juxtacrine and paracrine/autocrine growth factors, respectively. The enzymes that process the HB-EGF transmembrane form are unknown. Accordingly, an in vitro assay was established using a fusion protein in which alkaline phosphatase (AP) replaced the transmembrane and cytoplasmic domains of HB-EGF (HB-EGF JM-AP). The fusion protein was anchored to agarose beads coated with anti-AP antibodies. Several matrix metalloproteinases (MMPs) were tested for the ability to release soluble HB-EGF in the in vitro system. MMP-3 released soluble 12-kDa immunoreactive and mitogenic HB-EGF within 30 min. On the other hand neither MMP-2 nor MMP-9 had any cleavage activities. A non-cleavable mutant was prepared by replacing the juxtamembrane (JM) region of HB-EGF with the JM region of CD4. The mutant HB-EGF, which in its full-length form was as active a juxtacrine growth factor as was the wild type HB-EGF in vivo, was not cleaved by MMP-3 in the in vitro assay. The C-terminal portion of the cleaved HB-EGF JM-AP that remained attached to the anti-AP beads was N-terminally sequenced and the MMP-3 cleavage site was determined to be Glu151-Asn152, a site within the JM domain. MMP-3 treatment also released soluble HB-EGF in vivo from MC2 cells expressing transmembrane HB-EGF precursor, at a level of about 2-fold above control. It was concluded that MMP-3 cleaves HB-EGF at a specific site in the JM domain and that this enzyme might regulate the conversion of HB-EGF from being a juxtacrine to a paracrine/autocrine growth factor.