A variety of receptor-mediated signaling pathways are controlled by both positive and negative extracellular regulators. In this study, we demonstrate that a naturally occurring secreted form of the human ErbB3 receptor, p85-soluble ErbB3 (sErbB3), is a potent negative regulator of heregulin (HRG)-stimulated ErbB2, ErbB3, and ErbB4 activation. We show that p85-sErbB3 binds to HRG with an affinity comparable to that of full-length ErbB3 and competitively inhibits high affinity HRG binding to ErbB2/ErbB3 heterodimers on the cell surface of breast carcinoma cells with an IC(50) of 0.5 nM. p85-sErbB3 inhibits HRG-induced phosphorylation of ErbB2, ErbB3, and ErbB4 in breast carcinoma-derived cell lines and can also block HRG-stimulated activation of mitogen-activated protein kinase, Akt, and association of ErbB3 with the phosphatidylinositol 3'-kinase p85 regulatory subunit. Cell growth assays show that exogenous addition of a 100-fold molar excess of p85-sErbB3 inhibits HRG-stimulated cell growth by as much as 90%. Whereas several potential mechanisms of p85-sErbB3 inhibition of ErbB receptor activation exist, our results suggest that at least one means of inhibition is competition for HRG binding. The IC(50) for both p85-sErbB3- and 2C4 (a monoclonal antibody specific for ErbB2)-mediated inhibition of HRG binding is approximately 0.5 nM, although the mechanism of inhibition by these two proteins is distinct. Together these results suggest that p85-sErbB3 is a naturally occurring negative regulator of HRG-stimulated signal transduction that may have important therapeutic applications in human malignancies associated with HRG-mediated cell growth such as breast and prostate cancer.