Mutations in the neurofibromatosis type II (NF2) tumor suppressor predispose humans and mice to tumor development. The study of Nf2+/- mice has demonstrated an additional effect of Nf2 loss on tumor metastasis. The NF2-encoded protein, merlin, belongs to the ERM (ezrin, radixin, and moesin) family of cytoskeleton:membrane linkers. However, the molecular basis for the tumor- and metastasis- suppressing activity of merlin is unknown. We have now placed merlin in a signaling pathway downstream of the small GTPase Rac. Expression of activated Rac induces phosphorylation and decreased association of merlin with the cytoskeleton. Furthermore, merlin overexpression inhibits Rac-induced signaling in a phosphorylation-dependent manner. Finally, Nf2-/- cells exhibit characteristics of cells expressing activated alleles of Rac. These studies provide insight into the normal cellular function of merlin and how Nf2 mutation contributes to tumor initiation and progression.