CD44 is present in detergent-resistant, cholesterol-rich microdomains, called lipid rafts, in many types of cells. However, the functional significance of CD44 in lipid rafts is still unknown. We have previously demonstrated that osteopontin-mediated engagement of CD44 spliced variant isoforms promotes an extracellular matrix-derived survival signal through integrin activation. By using a series of CD44 mutants and pharmacological inhibitors selectively targeted to various cellular pathways, we show in this study that engagement of CD44 induces lipid raft coalescence to facilitate a CD44-Src-integrin signaling axis in lipid rafts, leading to increased matrix-derived survival. Palmitoylation of the membrane-proximal cysteine residues and carboxyl-terminal linkage to the actin cytoskeleton both contribute to raft targeting of CD44. The enrichment of integrin β1 in lipid rafts is tightly coupled to CD44 ligation-elicited lipid raft reorganization and associated with temporally delayed endocytosis. Through the interaction with the CD44 carboxyl-terminal ankyrin domain, Src is cotranslocated to lipid rafts, where it induces integrin activation via an inside-out mechanism. Collectively, this study demonstrates an important role of the dynamic raft reorganization induced by CD44 clustering in eliciting the matrix-derived survival signal.