CD44 is a widely distributed cell surface adhesion molecule and is implicated in diverse biological processes. However, the nature of intracellular signaling triggered by CD44 remains to be elucidated. Here, we show that CD44 undergoes sequential proteolytic cleavage in the ectodomain and intracellular domain, resulting in the release of a CD44 intracellular domain (ICD) fragment. Consequently, CD44ICD acts as a signal transduction molecule, where it translocates to the nucleus and activates transcription mediated through the 12-O-tetradecanoylphorbol 13-acetate–responsive element, which is found in numerous genes involved in diverse cellular processes. Expression of an uncleavable CD44 mutant as well as metalloprotease inhibitor treatment blocks CD44-mediated transcriptional activation. In search of the underlying mechanism, we have found that CD44ICD potentiates transactivation mediated by the transcriptional coactivator CBP/p300. Furthermore, we show that cells expressing CD44ICD produce high levels of CD44 messenger RNA, suggesting that the CD44 gene is one of the potential targets for transcriptional activation by CD44ICD. These observations establish a novel CD44 signaling pathway and shed new light on the functional link between proteolytic processing of an adhesion molecule at the cell surface and transcriptional activation in the nucleus.