Enterotoxigenic Bacteroides fragilis – organisms that live in the colon – secrete a metalloprotease toxin, B. fragilis toxin. This toxin binds to a specific intestinal epithelial cell receptor and stimulates cell proliferation, which is dependent, in part, on E-cadherin degradation and β-catenin–T-cell-factor nuclear signaling. γ-Secretase (or presenilin-1) is an intramembrane cleaving protease and is a positive regulator of E-cadherin cleavage and a negative regulator of β-catenin signaling. Here we examine the mechanistic details of toxin-initiated E-cadherin cleavage. B. fragilis toxin stimulated shedding of cell membrane proteins, including the 80 kDa E-cadherin ectodomain. Shedding of this domain required biologically active toxin and was not mediated by MMP-7, ADAM10 or ADAM17. Inhibition of γ-secretase blocked toxin-induced proteolysis of the 33 kDa intracellular E-cadherin domain causing cell membrane retention of a distinct β-catenin pool without diminishing toxin-induced cell proliferation. Unexpectedly, γ-secretase positively regulated basal cell proliferation dependent on the β-catenin–T-cell-factor complex. We conclude that toxin induces step-wise cleavage of E-cadherin, which is dependent on toxin metalloprotease and γ-secretase. Our results suggest that differentially regulated β-catenin pools associate with the E-cadherin–γ-secretase adherens junction complex; one pool regulated by γ-secretase is important to intestinal epithelial cell homeostasis.