Mounting evidence implicates stromal fibroblasts in breast carcinoma progression. We have recently shown in three-dimensional coculture experiments that human mammary fibroblasts stimulate the proliferation of T47D breast carcinoma cells and that this activity requires the shedding of the heparan sulfate proteoglycan syndecan-1 (Sdc1) from the fibroblast surface. The goal of this project was to determine the mechanism of Sdc1 ectodomain shedding. The broad spectrum matrix metalloproteinase (MMP) inhibitor GM6001 specifically blocked Sdc1-mediated carcinoma cell growth stimulation, pointing toward MMPs as critical enzymes involved in Sdc1 shedding. MMP-2 and membrane type 1 MMP (MT1-MMP) were the predominant MMPs expressed by the mammary fibroblasts. Fibroblast-dependent carcinoma cell growth stimulation in three-dimensional coculture was abolished by MT1-MMP expression silencing with small interfering RNA and restored either by adding recombinant MT1-MMP catalytic domain or by expressing a secreted form of Sdc1 in the fibroblasts. These findings are consistent with a model where fibroblast-derived MT1-MMP cleaves Sdc1 at the fibroblast surface, leading to paracrine growth stimulation of carcinoma cells by Sdc1 ectodomain. The relevance of MT1-MMP in paracrine interactions was further supported by coculture experiments with T47D cells and primary fibroblasts isolated from human breast carcinomas or matched normal breast tissue. Carcinoma-associated fibroblasts stimulated T47D cell proliferation significantly more than normal fibroblasts in three-dimensional coculture. Function-blocking anti-MT1-MMP antibody significantly inhibited the T47D cell growth stimulation in coculture with primary fibroblasts. In summary, these results ascribe a novel role to fibroblast-derived MT1-MMP in stromal-epithelial signaling in breast carcinomas.