Congenital renal dysplasia (RD) is a severe form of congenital renal malformation characterized by disruption of normal renal development with cyst formation, reduced or absent nephrons, and impaired renal growth. The authors previously identified that matrilysin (matrix metalloproteinase-7) was overexpressed in a microarray gene expression analysis of human RD compared to normal control kidneys. They now find that active matrilysin gene transcription and protein synthesis occur within dysplastic tubules and epithelial cells lining cysts in human RD by RT-PCR and immunohistochemistry. Similar staining patterns were seen in obstructed kidneys of pouch opossums that show histological features similar to that of human RD. In vitro, matrilysin inhibits formation of branching structures in mIMCD-3 cells stimulated by bone morphogenetic protein-7 (BMP-7) but does not inhibit hepatocyte growth factor-stimulated branching. BMP-7 signaling is essential for normal kidney development, and overexpression of catalytically active matrilysin in human embryonic kidney 293 cells reduces endogenous BMP-7 protein levels and inhibits phosphorylation of BMP-7 SMAD signaling intermediates. These findings suggest that matrilysin expression in RD may be an injury response that disrupts normal nephrogenesis by impairing BMP-7 signaling.