Autocrine EGF-receptor (EGFR) ligands are normally made as membrane-anchored precursors that are proteolytically processed to yield mature, soluble peptides. To explore the function of the membrane-anchoring domain of EGF, we expressed artificial EGF genes either with or without this structure in human mammary epithelial cells (HMEC). These cells require activation of the EGFR for cell proliferation. We found that HMEC expressing high levels of membrane- anchored EGF grew at a maximal rate that was not increased by exogenous EGF, but could be inhibited by anti–EGFR antibodies. In contrast, when cells expressed EGF lacking the membrane-anchoring domain (sEGF), their proliferation rate, growth at clonal densities, and receptor substrate phosphorylation were not affected by anti–EGFR antibodies. The sEGF was found to be colocalized with the EGFR within small cytoplasmic vesicles. It thus appears that removal of the membrane-anchoring domain converts autocrine to intracrine signaling. Significantly, sEGF inhibited the organization of HMEC on Matrigel, suggesting that spatial restriction of EGF access to its receptor is necessary for organization. Our results indicate that an important role of the membrane-anchoring domain of EGFR ligands is to restrict the cellular compartments in which the receptor is activated.