The tumor suppressor protein Merlin inhibits cell proliferation upon establishing cell-cell contacts. Because Merlin has high level of sequence similarity to the Ezrin-Radixin-Moesin family of proteins, the structural model of Ezrin-Radixin-Moesin protein autoinhibition and cycling between closed/resting and open/active conformational states is often employed to explain Merlin function. However, recent biochemical studies suggest alternative molecular models of Merlin function. Here, we have determined the low-resolution molecular structure and binding activity of Merlin and a Merlin(S518D) mutant that mimics the inactivating phosphorylation at S518 using small-angle neutron scattering and binding experiments. Small-angle neutron scattering shows that, in solution, both Merlin and Merlin(S518D) adopt a closed conformation, but binding experiments indicate that a significant fraction of either Merlin or Merlin(S518D) is capable of binding to the target protein NHERF1. Upon binding to the phosphatidylinositol 4,5-bisphosphate lipid, the wild-type Merlin adopts a more open conformation than in solution, but Merlin(S518D) remains in a closed conformation. This study supports a rheostat model of Merlin in NHERF1 binding and contributes to resolving a controversy about the molecular conformation and binding activity of Merlin.