Perlecan/HSPG2, a large heparan sulfate (HS) proteoglycan, normally is expressed in the basement membrane (BM) underlying epithelial and endothelial cells. During prostate cancer (PCa) cell invasion, a variety of proteolytic enzymes are expressed that digest BM components including perlecan. An enzyme upregulated in invasive PCa cells, matrilysin/matrix metalloproteinase-7 (MMP-7), was examined as a candidate for perlecan proteolysis both in silico and in vitro. Purified perlecan showed high sensitivity to MMP-7 digestion even when fully decorated with HS or when presented in native context connected with other BM proteins. In both conditions, MMP-7 produced discrete perlecan fragments corresponding to an origin in immunoglobulin (Ig) repeat region domain IV. While not predicted by in silico analysis, MMP-7 cleaved every subpart of recombinantly generated perlecan domain IV. Other enzymes relevant to PCa that were tested had limited ability to cleave perlecan including prostate specific antigen, hepsin, or fibroblast activation protein α. A long C-terminal portion of perlecan domain IV, Dm IV-3, induced a strong clustering phenotype in the metastatic PCa cell lines, PC-3 and C4-2. MMP-7 digestion of Dm IV-3 reverses the clustering effect into one favoring cell dispersion. In a C4-2 Transwell® invasion assay, perlecan-rich human BM extract that was pre-digested with MMP-7 showed loss of barrier function and permitted a greater level of cell penetration than untreated BM extract. We conclude that enzymatic processing of perlecan in the BM or territorial matrix by MMP-7 as occurs in the invasive tumor microenvironment acts as a molecular switch to alter PCa cell behavior and favor cell dispersion and invasiveness.