We assessed the functional significance of tumor cell-associated matrix metalloproteinase (MMP)-2 in extracellular matrix remodeling compared with that of the soluble enzyme by evaluating the contraction of three-dimensional collagen lattices by human glioma U251.3 and fibrosarcoma HT-1080 cell lines. In this model, the constitutive synthesis and activation of the MMP-2 proenzyme were modulated by stable transfections of tumor cells with cDNA encoding membrane type 1-MMP (MT1-MMP). The efficiency of transfected cells in contracting collagen lattices was shown to be dependent on the MT1-MMP-mediated activation of MMP-2 accompanied by cell surface association of activated MMP-2, on the cell-matrix interactions controlled by collagen-specific integrins, and on the integrity of actin and microtubule cytoskeletons. Each one of these mechanisms was essential but was not sufficient by itself in accomplishing gel contraction by MT1-MMP-transfected cells. Both MMP-2 activation and gel contraction by transfected glioma cells were inhibited by tissue inhibitor of metalloproteinase (TIMP)-2 and the recombinant COOH-terminal domain of MMP-2. However, the kinetics and mechanisms of their inhibitory effects were different, because TIMP-2 and the COOH-terminal domain of MMP-2 preferentially inhibited the MT1-MMP-dependent and autocatalytic steps of MMP-2 activation, respectively. By contrast, TIMP-1, an efficient inhibitor of soluble MMP-2 activity, failed to affect gel contraction. In addition, soluble MMP-2 activated by either organomercurials or cells was not able to induce the contraction of collagen lattices when added to transfected cells. Therefore, soluble activated MMP-2, sensitive to TIMP-1 inhibition, does not mediate collagen gel contraction by tumor cells, whereas the activity of cell surface-associated MMP-2 plays a critical role in remodeling of the extracellular matrix in vitro. These mechanisms of functional and spatial regulation of MMP-2 may also be applicable to different aspects of tissue reorganization in vivo, including cell migration and invasion, angiogenesis, and wound healing.