To delineate the role of matrix metalloproteinase 7 (MMP7) in mammary tumorigenesis, MMP7 was expressed in the normal murine mammary gland cell line, c57MG. MMP7 markedly enhanced the growth rate of the c57MG cells in three-dimensional culture and promoted tumor formation in vivo. Subsequent investigation showed that MMP7 (a) up-regulated ErbB4 receptor levels, (b) solubilized the ErbB4 receptor cognate ligand heparin-bound epidermal growth factor, and (c) mediated the proteolytic processing of ErbB4 to yield a soluble intracellular domain (ICD) that localized to the cytoplasm and the nucleus. Furthermore, overexpression of the ErbB4 ICD in the c57MG cell line recapitulated the proliferative effects of MMP7 in vitro and in vivo. These data indicate a novel mechanism for mammary epithelial cell transformation by MMP7.