Although syndecan-2 is known to interact with the matrix metalloproteinase-7 (MMP-7), the details of their interaction were unknown. Our experiments with a series of syndecan-2 extracellular domain deletion mutants show that the interaction is mediated through an interaction of the extracellular domain of syndecan-2 (residues 41 to 60) with the α2 helix-loop-α3 helix in the pro-domain of MMP-7. NMR and molecular docking model show that Glu7 of the α1 helix, Glu32 of the α2 helix, and Gly48 and Ser52 of the α2 helix-loop-α3 helix of the MMP-7 pro-domain form the syndecan-2-binding pocket, which is occupied by the side chain of tyrosine residue 51 (Tyr51) of syndecan-2. Consistent with this notion, the expression of a syndecan-2 mutant in which Tyr51 was changed to Ala diminished the interaction between the syndecan-2 extracellular domain and the pro-domain of MMP-7. Furthermore, HT-29 colon adenocarcinoma cells expressing the interaction-defective mutant exhibited reductions in the cell-surface localization of MMP-7, the processing of pro-MMP-7 into active MMP-7, the MMP-7-mediated extracellular domain shedding of both syndecan-2 and E-cadherin, and syndecan-2-mediated anchorage-independent growth. Collectively, these data strongly suggest that Tyr51 of the syndecan-2 extracellular domain mediates its interaction with and activating processing of pro-MMP-7 and regulates MMP-7-dependent syndecan-2 functions.