Members of the membrane-type matrix metalloproteinase (MT-MMPs) family are dual regulators of extracellular matrix remodeling through direct degradation of extracellular matrix components and activation of other latent MMPs. However, the structural basis of this functional diversity remains poorly understood. In an attempt to dissect the structural determinants for MT-MMP function, we performed domain exchange experiments between MT1-MMP and its close relative MT3-MMP and analyzed the exchange chimeras for pro-MMP-2 activation and collagen degradation at the cellular level. Our results indicate that catalytic domains determine the pattern of pro-MMP-2 activation, whereas pexin-like domains modulate the level of activation. On the other hand, both the catalytic and pexin-like domains of MT1-MMP are required for strong collagenolysis because exchanging either domain with that of MT3-MMP yielded significantly lower activity, and the introduction of the MT1-MMP catalytic or pexin-like domain into MT3-MMP failed to generate any significant enhancement of collagenolytic activity compared with wild-type MT3-MMP. Interestingly, the cytoplasmic domain of MT1-MMP behaves as a negative regulator not only for MT1-MMP itself, but also for MT3-MMP in both pro-MMP-2 activation and collagenolysis, consistent with and extending our recent findings (Jiang, A., Lehti, K., Wang, X., Weiss, S. J., Keski-Oja, J., and Pei, D. (2001) Proc. Natl. Acad. Sci. U. S. A. 98, 13693-13698). Taken together, these results demonstrate that domains in MT-MMPs function differently toward a given substrate and thus should be targeted differentially for future therapeutic development.