The neurofibromatosis 2 (NF2) tumor suppressor protein, merlin, functions as a negative growth regulator; however, the molecular mechanisms that underlie merlin regulation remain elusive. Recent studies have implicated merlin phosphorylation in regulating merlin subcellular localization and growth suppression. P21-activated kinase (PAK), a downstream target of Rac1/Cdc42, directly phosphorylates merlin at Serine 518. In this report, we show that PAK2 directly phosphorylates wild-type merlin, whereas merlin truncation mutants with impaired GST-amino-terminal domain (N-term or NTD)/GST-carboxy-terminal domain (C-term or CTD) intramolecular association exhibit impaired S518 phosphorylation. We directly demonstrate that PAK2 phosphorylation impairs merlin N-term/C-term binding in vitro and in vivo. Lastly, we show that PAK2 phosphorylation impairs the ability of merlin to bind to two interacting proteins, CD44 and hepatocyte growth factor-regulated tyrosine kinase substrate (HRS), both critical for merlin growth suppression. These observations suggest that merlin S518 phosphorylation directly modulates merlin intramolecular and intermolecular associations important for the ability of merlin to function as a tumor suppressor.