MT1-MMP is a membrane-bound matrix metalloproteinase (MT-MMP) capable of mediating pericellular proteolysis of extracellular matrix components. MT1-MMP is therefore thought to be an important molecular tool for cellular remodeling of the surrounding matrix. To establish the biological role of this membrane proteinase we generated MT1-MMP-deficient mice by gene targeting. MT1-MMP deficiency causes craniofacial dysmorphism, arthritis, osteopenia, dwarfism, and fibrosis of soft tissues due to ablation of a collagenolytic activity that is essential for modeling of skeletal and extraskeletal connective tissues. Our findings demonstrate the pivotal function of MT1-MMP in connective tissue metabolism, and illustrate that modeling of the soft connective tissue matrix by resident cells is essential for the development and maintenance of the hard tissues of the skeleton.