The extracellular domain of several membrane-anchored proteins can be released as a soluble fragment by the action of a cell surface endoproteolytic system. This cleavage results in the generation of a soluble and a cell-bound fragment. In the case of proteins with signaling capability, such as tyrosine kinase receptors, the cleavage process may have an effect on the kinase activity of the cell-bound receptor fragment. By using several cell lines that express the TrkA neurotrophin receptor, we show that this receptor tyrosine kinase is cleaved by a proteolytic system that mimics the one that acts at the cell surface. TrkA cleavage is regulated by protein kinase C and several receptor agonists (including the TrkA ligand NGF), occurs at the ectodomain in a membrane-proximal region, and is independent of lysosomal function. TrkA cleavage results in the generation of a cell-associated fragment that is phosphorylated on tyrosine residues. Tyrosine phosphorylation of this fragment is not detected in TrkA mutants devoid of kinase activity, suggesting that phosphorylation requires an intact TrkA kinase domain, and is not due to activation of an intermediate intracellular tyrosine kinase. The increased phosphotyrosine content of the cell-bound fragment may thus reflect higher catalytic activity of the truncated fragment. We postulate that cleavage of receptor tyrosine kinases by this naturally occurring cellular mechanism may represent an additional mean for the regulation of receptor activity.