Tumor necrosis factor-alpha (TNF) converting enzyme (TACE) is responsible for shedding of various membrane proteins including proinflammatory cytokine TNF. In vivo regulation of TACE is poorly understood mainly due to lack of reliable methodology to measure TACE activity in cell-based assays. Here we report a novel enzyme assay that enables continuous real-time measurement of TACE activity on the surface of live cells. Cells were incubated with a new fluorescent resonance energy transfer peptide consisting of a TACE-sensitive TNF sequence and fluorescein-tetramethylrhodamine (FAM-TAMRA), and enzyme activity was monitored by the rate of increase in fluorescent signal due to peptide cleavage. Validation studies using resting as well as stimulated monocytic cells indicated that the assay was sensitive, reproducible and quantitative. Pharmacological studies with various inhibitors indicated that the observed enzyme activity could largely be ascribed to TACE. Thus, the FAM-TAMRA peptide provides a powerful tool for measurement of constitutive and inducible cellular TACE activity. The principles developed may be applied to analyses of enzyme activity of various sheddases on live cells.