Prostasin, a trypsin-like serine peptidase, is highly expressed in prostate, kidney and lung epithelia, where it is bound to the cell surface or secreted, or both. Prostasin activates the epithelial sodium channel (ENaC) and suppresses invasion of prostate and breast cancer cells. The studies reported here establish mechanisms of membrane anchoring and secretion in kidney and lung epithelial cells and demonstrate a critical role for prostasin in regulating epithelial monolayer function. We report that endogenous mouse prostasin is glycosylphosphatidylinositol (GPI)-anchored to the cell surface and is constitutively secreted from the apical surface of kidney cortical collecting duct cells. Using site-directed mutagenesis, detergent phase separation and RNA interference approaches, we show that prostasin secretion depends on GPI-anchor cleavage by endogenous GPI-specific phospholipase D1. Secretion of prostasin by kidney and lung epithelial cells, in contrast to prostate epithelium, does not depend on C-terminal processing at conserved Arg₃₂₂. Using stably transfected M-1 cells expressing wild type, catalytically inactive, or chimeric transmembrane (not GPI)-anchored prostasins we establish that prostasin regulates transepithelial resistance, current and paracellular permeability by GPI-anchor and protease activity-dependent mechanisms. These studies demonstrate a novel role for prostasin in regulating epithelial monolayer permeability in kidney epithelial cells, and also show specifically that prostasin is a critical channel-activating protease that regulates transepithelial ion transport in M-1 cells. These functions depend on the GPI-anchor as well as peptidase activity of prostasin. These studies suggest that cell-specific Gpld1- or peptidase-dependent pathways for prostasin secretion may control prostasin functions in a tissue-specific manner.