Ectodomain cleavage (shedding) of transmembrane proteins by metalloproteases (MMP) generates numerous essential signaling molecules, but its regulation is not totally understood. CD44, a cleaved transmembrane glycoprotein, exerts both antiproliferative or tumor-promoting functions, but whether proteolysis is required for this is not certain. CD44-mediated contact inhibition and cellular proliferation are regulated by counteracting CD44 C-terminal interacting proteins, the tumor suppressor protein merlin (NF2) and ERM proteins (ezrin, radixin, moesin). We show here that activation or overexpression of constitutively active merlin or downregulation of ERMs inhibited 12-O-tetradecanoylphorbol-13-acetate (TPA)-induced [as well as serum, hepatocyte growth factor (HGF), or plateletderived growth factor (PDGF)] CD44 cleavage by the metalloprotease ADAM10, whereas overexpressed ERM proteins promoted cleavage. Merlin-and ERM-modulated Ras or Rac activity was not required for this function. However, latrunculin (an actin-disrupting toxin) or an ezrin mutant which is unable to link CD44 to actin, inhibited CD44 cleavage, identifying a cytoskeletal C-terminal link as essential for induced CD44 cleavage. Cellular migration, an important tumor property, depended on CD44 and its cleavage and was inhibited by merlin. These data reveal a novel function of merlin and suggest that CD44 cleavage products play a tumor-promoting role. Neuregulin, an EGF ligand released by ADAM17 from its proform NRG1, is predominantly involved in regulating cellular differentiation. In contrast to CD44, release of neuregulin from its pro-form was not regulated by merlin or ERM proteins. Disruption of the actin cytoskeleton however, also inhibited NRG1 cleavage. This current study presents one of the first examples of substrate-selective cleavage regulation. Implications: Investigating transmembrane protein cleavage and their regulatory pathways have provided new molecular insight into their important role in cancer formation and possible treatment.