The extracellular sulfatases Sulf1 and Sulf2 remodel the 6O-sulfation state of heparan sulfate proteoglycans on the cell surface, thereby modulating growth factor signaling. Different from all other sulfatases, the Sulfs contain a unique, positively charged hydrophilic domain (HD) of about 320 amino acid residues. Using various HD deletion mutants and glutathione S-transferase (GST)-HD fusion proteins, this study demonstrates that the HD is required for enzymatic activity and acts as a high affinity heparin/heparan sulfate interaction domain. Association of the HD with the cell surface is sensitive to heparinase treatment, underlining specificity toward heparan sulfate chains. Correspondingly, isolated GST-HD binds strongly to both heparin and heparan sulfate in vitro and also to living cells. Surface plasmon resonance studies indicate nanomolar affinity of GST-HD toward immobilized heparin. The comparison of different mutants reveals that especially the outer regions of the HD mediate heparan sulfate binding, probably involving "tandem" interactions. Interestingly, binding to heparan sulfate depends on the presence of 6O-sulfate substrate groups, suggesting that substrate turnover facilitates release of the enzyme from its substrate. Deletion of the inner, less conserved region of the HD drastically increases Sulf1 secretion without affecting enzymatic activity or substrate specificity, thus providing a tool for the in vitro modulation of HS-dependent signaling as demonstrated here for the signal transduction of fibroblast growth factor 2. Taken together, the present study shows that specific regions of the HD influence different aspects of HS binding, cellular localization, and enzyme function.The human sulfatases represent a family of 17 enzymes responsible for the turnover and remodeling of sulfate esters and sulfamates. Their reaction mechanism relies on a special amino acid residue, C␣-formylglycine, which is generated posttranslationally via oxidation of a conserved cysteine residue in the active site (1-3). Besides the lysosomal sulfatases involved in the cellular degradation of various sulfated substrates (4), two extracellular sulfatases, Sulf1 and Sulf2 (the Sulfs), have been described (5, 6). The Sulfs are endosulfatases with restricted substrate specificity toward 6O-sulfate groups of heparan sulfate (HS), 2 an information-rich glycosaminoglycan (GAG) polymer attached to proteoglycans at the cell surface and in the extracellular matrix (6 -8). HS proteoglycans (HSPGs) act as co-receptors in cell signaling pathways and provide binding sites for growth factors and morphogens via specific sulfation patterns on their HS chains. By enzymatically removing 6O-sulfate groups from HSPGs on the cell surface, Sulf1 and Sulf2 differentially regulate the activity of FGF, vascular endothelial growth factor, Wnt, and other HS ligands, thereby modulating important processes such as development, cell growth, and differentiation (9 -12). Misregulation of the Sulfs has been linked with both tumor progression and suppr...