The hyaluronan receptor CD44 undergoes sequential proteolytic cleavage at the cell surface. The initial cleavage of the CD44 extracellular domain is followed by a second intramembranous cleavage of the residual CD44 fragment, liberating the C-terminal cytoplasmic tail of CD44. In this study conditions that promote CD44 cleavage resulted in a diminished capacity to assemble and retain pericellular matrices even though sufficient non-degraded full-length CD44 remained. Using stable and transient overexpression of the cytoplasmic domain of CD44, we determined that the intracellular domain interfered with anchoring of the full-length CD44 to the cytoskeleton and disrupted the ability of the cells to bind hyaluronan and assemble a pericellular matrix. Co-immunoprecipitation assays were used to determine whether the mechanism of this interference was due to competition with actin adaptor proteins. CD44 of control chondrocytes was found to interact and co-immunoprecipitate with both the 65- and 130-kDa isoforms of ankyrin-3. Moreover, this interaction with ankyrin-3 proteins was diminished in cells overexpressing the CD44 intracellular domain. Mutating the putative ankyrin binding site of the transiently transfected CD44 intracellular domain diminished the inhibitory effects of this protein on matrix retention. Although CD44 in other cells types has been shown to interact with members of the ezrin/radixin/moesin (ERM) family of adaptor proteins, only modest interactions between CD44 and moesin could be demonstrated in chondrocytes. The data suggest that release of the CD44 intracellular domain into the cytoplasm of cells such as chondrocytes exerts a competitive or dominant-negative effect on the function of full-length CD44.