Cell fusion is essential for fertilization, myotube formation, and inflammation. Macrophages fuse under various circumstances, but the molecular signals involved in the distinct steps of their fusion are not fully characterized. Using null mice and derived cells, we show that the protease MT1-MMP is necessary for macrophage fusion during osteoclast and giant-cell formation in vitro and in vivo. Specifically, MT1-MMP is required for lamellipodia formation and for proper cell morphology and motility of bone marrow myeloid progenitors prior to membrane fusion. These functions of MT1-MMP do not depend on MT1-MMP catalytic activity or downstream pro-MMP-2 activation. Instead, MT1-MMP null cells show a decreased Rac1 activity and reduced membrane targeting of Rac1 and the adaptor protein p130Cas. Retroviral rescue experiments and protein binding assays delineate a signaling pathway in which MT1-MMP, via its cytosolic tail, contributes to macrophage migration and fusion by regulating Rac1 activity through an association with p130Cas.