Placental growth factor (PlGF) is a critical mediator of blood vessel formation, yet mechanisms of its action and regulation are incompletely understood. Here we demonstrate that proteolytic processing regulates the biological activity of PlGF. Specifically, we show that plasmin processing of PlGF-2 yields a protease-resistant core fragment comprising the vascular endothelial growth factor receptor-1 binding site but lacking the carboxyl-terminal domain encoding the heparin-binding domain and an 8-amino acid peptide encoded by exon 7. We have identified plasmin cleavage sites, generated a truncated PlGF118 isoform mimicking plasmin-processed PlGF, and explored its biological function in comparison with that of PlGF-1 and -2. The angiogenic responses induced by the diverse PlGF forms were distinct. Whereas PlGF-2 increased endothelial cell chemotaxis, vascular sprouting, and granulation tissue formation upon skin injury, these activities were abrogated following plasmin digestion. Investigation of PlGF/Neuropilin-1 binding and function suggests a critical role for heparin-binding domain/Neuropilin-1 interaction and its regulation by plasmin processing. Collectively, here we provide new mechanistic insights into the regulation of PlGF-2/Neuropilin-1-mediated tissue vascularization and growth.