The Drosophila Argos protein is the only known extracellular inhibitor of the epidermal growth factor receptor (EGFR), It is structurally related to the activating ligands, in that it is a secreted protein with a single epidermal growth factor (EGF) domain, To understand the mechanism of Argos inhibition, we have investigated which regions of the protein are essential, A series of deletions were made and tested in vivo; furthermore, by analyzing chimeric proteins between Argos and the activating ligand, Spitz (a transforming growth factor-alpha-like factor), we have examined what makes one inhibitory and the other activating, Our results reveal that Argos has structural requirements that differ from all known EGFR activating ligands; domains flanking the EGF domain are essential for its function, We have also defined the important regions of the atypical Argos EGF domain, The extended B-loop is necessary, whereas the C-loop can be replaced with the equivalent Spitz region without substantially affecting Argos function, Comparison of the argos genes from Drosophila melanogaster and the housefly, Musca domestica, supports our structure-function analysis, These studies are a prerequisite for understanding how Argos inhibits the Drosophila EGFR and provide a basis for designing mammalian EGFR inhibitors.