The neurofibromatosis-2 (NF2) gene encodes merlin, an ezrin-radixin-moesin-(ERM)-related protein that functions as a tumor suppressor. We found that merlin mediates contact inhibition of growth through signals from the extracellular matrix. At high cell density, merlin becomes hypo-phosphorylated and inhibits cell growth in response to hyaluronate (HA), a mucopolysaccharide that surrounds cells. Merlin's growth-inhibitory activity depends on specific interaction with the cytoplasmic tail of CD44, a transmembrane HA receptor. At low cell density, merlin is phosphorylated, growth permissive, and exists in a complex with ezrin, moesin, and CD44. These data indicate that merlin and CD44 form a molecular switch that specifies cell growth arrest or proliferation.