The neurofibromatosis type 2 tumor suppressor protein, merlin, is related to the ERM (ezrin, radixin, and moesin) family of plasma membrane-actin cytoskeleton linkers. For ezrin, phosphatidylinositol 4,5-bisphosphate (PIP 2 ) binding to the amino-terminal FERM domain is required for its conformational activation, proper subcellular localization, and function, but less is known about the role of phosphoinositide binding for merlin. Current evidence indicates that association with the membrane is important for merlin to function as a growth regulator; however, the mechanisms by which merlin localizes to the membrane are less clear. Here, we report that merlin binds phosphoinositides, including PIP 2 , via a conserved binding motif in its FERM domain. Abolition of FERM domain-mediated phosphoinositide binding of merlin displaces merlin from the membrane and releases it into the cytosol without altering the folding of merlin. Importantly, a merlin protein whose FERM domain cannot bind phosphoinositide is defective in growth suppression. Retargeting the mutant merlin into the membrane using a dual-acylated amino-terminal decapeptide from Fyn is sufficient to restore the growth-suppressive properties to the mutant merlin. Thus, FERM domain-mediated phosphoinositide binding and membrane association are critical for the growth-regulatory function of merlin.Merlin, the neurofibromatosis type 2 (NF2) tumor suppressor protein, is a member of the band 4.1/ERM family of plasma membrane-actin cytoskeleton linkers (6). Like other members of this family, merlin has a globular amino-terminal FERM (four point one, ezrin, radixin, and moesin) domain followed by an ␣-helical coiled-coil domain and a carboxy-terminal domain (28, 58). The amino and carboxy termini of merlin and ERM proteins can bind one another; thus, these proteins can exist in two states, open and closed (6,57). Interconversion between the two states is regulated by phosphorylation near the carboxy terminus. For ERM, the best-studied phosphorylated residue is a conserved threonine (ezrin T567, radixin T564, and moesin T558) (42). Likewise, for merlin, the phosphorylated residue is S518 (56); only the dephosphorylated, closed conformation is believed to be growth suppressive (44,55,57).For ezrin, phosphorylation and the ability to undergo conformational changes are regulated by the binding of the FERM domain to the membrane lipid, phosphoinositide-(4,5)-bisphosphate (PIP 2 ) (3, 14). PIP 2 facilitates the binding of ERM proteins to membrane proteins (21, 24). Recent studies showed that even after ezrin is phosphorylated, PIP 2 binding is the primary regulator of ERM membrane association (19).The residues implicated in PIP 2 binding are conserved among the ERM proteins (17,36,58), and sequence homology suggests that there are potential PIP 2 binding motifs in the merlin FERM domain. Exogenous addition of PIP 2 enhances the binding of a regulatory cofactor for Na ϩ -H ϩ exchange (NHE-RF) to merlin in vitro (16), suggesting that PIP 2 binding might play an important ro...