The extracellular matrix macromolecule laminin-5 (Ln-5) is converted by matrix metalloproteinases (MMP) MT1-MMP and MMP-2 into a migration-promoting substrate in vitro. We now report that cleavage of Ln-5 by MT1-MMP occurs in vivo and affects epithelial tissue organization and probably Ln-5 turnover. In MT1-MMP knockout (KO) mice, the kidneys showed increased levels of total Ln-5 gamma2 subunit, but significantly reduced amounts of gamma2', an amino-terminal truncated proteolytic form of gamma2. The kidney tubular epithelia of KO animals were poorly differentiated, a phenotype reminiscent of human congenital mixed hypoplastic/dysplastic disorders. To establish a better link between Ln-5 proteolytic cleavage and epithelial morphology, MT1-MMP expression was reconstituted by transfection of MT1-MMP into a Ln-5 positive, MT1-MMP deficient epithelial cell line. MT1-MMP transfectants demonstrated increased levels of processed Ln-5 gamma2 chain and enhanced spreading on Ln-5, but not fibronectin. Recombinant MT1-MMP cleaved gamma2 constructs in vitro at a known in vivo gamma2 gamma2' processing site. These results strongly indicate that Ln-5 is a physiological substrate of MT1-MMP in vivo. Proteolytic processing of gamma2 subunit by MT1-MMP may influence Ln-5 turnover in epithelial basement membranes and affect epithelial morphogenesis.