Increased pericellular proteolysis due to an imbalance between MMPs (matrix metalloproteinases) and TIMPs (tissue inhibitors of metalloproteinases) promotes early stages of tumorigenesis. We have reported that TIMP-1 down-regulation confers tumorigenicity on immortal Swiss 3T3 fibroblasts. In pursuit of the mechanism involved in this transformation, we asked whether MMP inhibitors modulate contact inhibition and cell adhesion, because the dysregulation of these events is essential for cellular transformation. Using both genetic and biochemical means, we demonstrate that MMP inhibitors regulate fibroblast cell adhesion. TIMP-1 down-regulated cells formed dense, multilayered colonies, suggesting a loss of contact inhibition. Recombinant TIMP-1 and synthetic MMP inhibitors (MMPi) restored normal cell contact and density of these cells in a dose-dependent manner. Consequently, the effect of MMPi on both cell-extracellular matrix (ECM) and cell-cell adhesion were investigated. Upon MMPi treatment, p125(FAK) was redistributed, together with vinculin, to points of cell-ECM contact. Furthermore, phosphorylation of p125(FAK) was restored to levels similar to that of wild type. In parallel, MMPi treatment increased cadherin levels and stabilized cadherin-mediated cell-cell contacts. Moreover, enhanced cadherin function was evident as increased calcium-dependent cell-cell aggregation and co-localization of cadherin and beta-catenin at the cell membrane. We also obtained independent evidence of altered cadherin function using timp-1(-/-) mouse embryonic fibroblasts. Our data provide provocative evidence that increased pericellular proteolysis impacts cell adhesion systems to offset normal contact inhibition, with subsequent effects on cell transformation and tumorigenesis.