Neu (c-erbB2) is a proto-oncogene product that encodes an epidermal growth factor-like receptor tyrosine kinase. Amplification of wild-type c-Neu and mutational activation of Neu (Neu T) have been implicated in oncogenic transformation of cultured fibroblasts and mammary tumorigenesis in vivo. Here, we examine the relationship between Neu tyrosine kinase activity and caveolin-1 protein expression in vitro and in vivo. Recent studies have suggested that caveolins may function as negative regulators of signal transduction. Our current results show that mutational activation of c-Neu down-regulates caveolin-1 protein expression, but not caveolin-2, in cultured NIH 3T3 and Rat 1 cells. Conversely, recombinant overexpression of caveolin-1 blocks Neu-mediated signal transduction in vivo. These results suggest a reciprocal relationship between c-Neu tyrosine kinase activity and caveolin-1 protein expression. We next analyzed a variety of caveolin-1 deletion mutants to map this caveolin-1-dependent inhibitory activity to a given region of the caveolin-1 molecule. Results from this mutational analysis show that this functional in vivo inhibitory activity is contained within caveolin-1 residues 32-95. In accordance with these in vivo studies, a 20-amino acid peptide derived from this region (the caveolin-1 scaffolding domain) was sufficient to inhibit Neu autophosphorylation in an in vitro kinase assay. To further confirm or refute the relevance of our findings in vivo, we next examined the expression levels of caveolin-1 in mammary tumors derived from c-Neu transgenic mice. Our results indicate that dramatic reduction of caveolin-1 expression occurs in mammary tumors derived from c-Neu-expressing transgenic mice and other transgenic mice expressing downstream effectors of Neu-mediated signal transduction, such as Src and Ras. Taken together, our data suggest that a novel form of reciprocal negative regulation exists between c-Neu and caveolin-1.