Transglutaminase 2 (TG2) is a multifunctional protein that has been implicated in numerous pathologies including that of neurodegeneration and celiac disease, but the molecular interactions that mediate its diverse activities are largely unknown. Bcr and the closely related Abr negatively regulate the small G-protein Rac: loss of their combined function in vivo results in increased reactivity of innate immune cells. Bcr and Abr are GTPase-activating proteins that catalyze the hydrolysis of the GTP bound to Rac. However, how the Bcr and Abr GTPase-activating activity is regulated is not precisely understood. We here report a novel mechanism of regulation through direct protein-protein interaction with TG2. TG2 bound to the Rac-binding pocket in the GTPase-activating domains of Bcr and Abr, blocked Bcr activity and, through this mechanism, increased levels of active GTP-bound Rac and EGF-stimulated membrane ruffling. TG2 exists in at least two different conformations. Interestingly, experiments using TG2 mutants showed that Bcr exhibits preferential binding to the non-compacted conformation of TG2, in which its catalytic domain is exposed, but transamidation is not needed for the interaction. Thus, TG2 regulates levels of cellular GTP-bound Rac and actin cytoskeletal reorganization through a new mechanism involving direct inhibition of Bcr GTPase-activating activity.