Activated leukocyte cell adhesion molecule (ALCAM/CD166), a member of the immunoglobulin superfamily with five extracellular immunoglobulin-like domains, facilitates heterophilic (ALCAM-CD6) and homophilic (ALCAM-ALCAM) cell-cell interactions. While expressed in a wide variety of tissues and cells, ALCAM is restricted to subsets of cells usually involved in dynamic growth and/or migration processes. A structure-function analysis, using two monoclonal anti-ALCAM antibodies and a series of amino-terminally deleted ALCAM constructs, revealed that homophilic cell adhesion depended on ligand binding mediated by the membrane-distal amino-terminal immunoglobulin domain and on avidity controlled by ALCAM clustering at the cell surface involving membrane-proximal immunoglobulin domains. Co-expression of a transmembrane ALCAM deletion mutant, which lacks the ligand binding domain, and endogenous wild-type ALCAM inhibited homophilic cell-cell interactions by interference with ALCAM avidity, while homophilic, soluble ligand binding remained unaltered. The extracellular structures of ALCAM thus provide two structurally and functionally distinguishable modules, one involved in ligand binding and the other in avidity. Functionality of both modules is required for stable homophilic ALCAM-ALCAM cell-cell adhesion.