Myostatin, a transforming growth factor-β superfamily ligand, negatively regulates skeletal muscle growth. Generation of the mature signaling peptide requires cleavage of pro-myostatin by a proprotein convertase, which is thought to occur constitutively in the Golgi apparatus. In serum, mature myostatin is found in an inactive, non-covalent complex with its prodomain. We find that in skeletal muscle, unlike serum, myostatin is present extracellularly as uncleaved pro-myostatin. In cultured cells, co-expression of pro-myostatin and latent transforming growth factor-β-binding protein-3 (LTBP-3) sequesters pro-myostatin in the extracellular matrix, and secreted pro-myostatin can be cleaved extracellularly by the proprotein convertase furin. Co-expression of LTBP-3 with myostatin reduces phosphorylation of Smad2, and ectopic expression of LTBP-3 in mature mouse skeletal muscle increases fiber area, consistent with reduction of myostatin activity. We propose that extracellular pro-myostatin constitutes the major pool of latent myostatin in muscle. Post-secretion activation of this pool by furin family proprotein convertases may therefore represent a major control point for activation of myostatin in skeletal muscle.