Our previous report (Muir, D., S. Varon, and M. Manthorpe. 1990. J. Cell Biol. 109:2663-2672) described the isolation and partial characterization of a 55-kD antiproliferative protein found in Schwann cell (SC) and schwannoma cell line-conditioned media and we concluded that SC proliferation is under negative autocrine control. In the present study the 55-kD protein was found to possess metalloprotease activity and stromelysin immunoreactivity. The SC-derived metalloprotease shares many properties with stromelysin isolated from other sources including the ability to cleave fibronectin (FN). Furthermore, limited proteolysis of FN by the SC-derived protease generated a FN fragment which itself expresses a potent antiproliferative activity for SCs. The active FN fragment corresponds to the 29-kD amino-terminal region of the FN molecule which was also identified as an active component in SC CM. Additional evidence that a proteolytic fragment of FN can possess antiproliferative activity for SCs was provided by the finding that plasmin can generate an amino-terminal FN fragment which mimicked the activity of the SC metalloprotease-generated antiproliferative FN fragment. Both the 55-kD SC metalloprotease and the 29-kD FN fragment could completely and reversibly inhibit proliferation of SCs treated with various mitogens and both were largely ineffective at inhibiting proliferation by immortalized or transformed SC lines. Normal and transformed SC types do secrete the proform of stromelysin, however, transformed cultures do not produce activated stromelysin and thus cannot generate the antiproliferative fragment of FN. These results suggest that, once activated, a SC-derived protease similar to stromelysin cleaves FN and generates an antiproliferative activity which can maintain normal SC quiescence in vitro.