Although tissue inhibitor of metalloproteinase‐2 (TIMP‐2) is known to be not only an inhibitor of matrix metalloproteinases (MMP) but also a cofactor for membrane‐type 1 MMP (MT1‐MMP)‐mediated MMP‐2 activation, it is still unclear how TIMP‐2 regulates MMP‐2 activation and cleavage of substrates by MT1‐MMP. In the present study we examined the levels of cell‐surface MT1‐MMP, MMP‐2 activation and cleavage of MT1‐MMP substrates in 293T cells transfected with the MT1‐MMP and TIMP‐2 genes. Co‐expression of TIMP‐2 at an appropriate level increased the level of cell‐surface MT1‐MMP, both the TIMP‐2‐bound and free forms, and generated processed MMP‐2 with gelatin‐degrading activity. In contrast, MT1‐MMP substrates testican‐1 and syndecan‐1 were cleaved by the cells expressing MT1‐MMP, which was inhibited by TIMP‐2 even at levels that stimulate MMP‐2 activation. These results suggest that TIMP‐2 environment determines MT1‐MMP substrate choice between direct cleavage of its own substrates and MMP‐2 activation. ( Cancer Sci 2007; 98: 563–568)