Using expression cloning to screen a human fetal kidney cDNA library for regulator(s) of pro-matrix metalloproteinase (MMP)-2 processing mediated by membrane-type (MT) 1 MMP, we isolated a cDNA whose product interfered with pro-MMP-2 activation. It encodes the NH(2)-terminal 313-amino acid region of a calcium-binding proteoglycan, testican 3, with a 3-amino acid substitution at the COOH terminus and thus was named N-Tes. N-Tes comprises a signal peptide, a unique domain, a follistatin-like domain, and a Ca(2+)-binding domain but lacks a COOH-terminal thyroglobulin domain and two putative glycosaminoglycan attachment sites of testican 3. Pro-MMP-2 activation by MT3-MMP was also inhibited by the coexpression of N-Tes. Immunoprecipitation analysis demonstrated direct interaction of N-Tes with either MT1-MMP or MT3-MMP. Expression of testican 1 or testican 3 but not testican 2 also inhibited pro-MMP-2 activation by either MT1-MMP or MT3-MMP. Deletion and substitution of amino acids residues in N-Tes revealed that the unique NH(2)-terminal domain of N-Tes is responsible for the inhibition of pro-MMP-2 activation by MT-MMPs. Expression of N-Tes and testican 3 was detected in normal brain but down-regulated in glioma tissues. Transfection of either the N-Tes or testican 3 gene into U251 glioma cells or Madin-Darby canine kidney cells transformed by erbB2 suppressed their invasive growth in collagen gel. These results suggest that both N-Tes and testican 3 would interfere with tumor invasion by inhibiting MT-MMPs.