The extracellular sulfatases Sulf1 and Sulf2 remodel the 6O-sulfation state of heparan sulfate proteoglycans on the cell surface, thereby modulating growth factor signaling. Different from all other sulfatases, the Sulfs contain a unique, positively charged hydrophilic domain (HD) of about 320 amino acid residues. Using various HD deletion mutants and glutathione S-transferase (GST)-HD fusion proteins, this study demonstrates that the HD is required for enzymatic activity and acts as a high affinity heparin/heparan sulfate interaction domain. Association of the HD with the cell surface is sensitive to heparinase treatment, underlining specificity toward heparan sulfate chains. Correspondingly, isolated GST-HD binds strongly to both heparin and heparan sulfate in vitro and also to living cells. Surface plasmon resonance studies indicate nanomolar affinity of GST-HD toward immobilized heparin. The comparison of different mutants reveals that especially the outer regions of the HD mediate heparan sulfate binding, probably involving "tandem" interactions. Interestingly, binding to heparan sulfate depends on the presence of 6O-sulfate substrate groups, suggesting that substrate turnover facilitates release of the enzyme from its substrate. Deletion of the inner, less conserved region of the HD drastically increases Sulf1 secretion without affecting enzymatic activity or substrate specificity, thus providing a tool for the in vitro modulation of HS-dependent signaling as demonstrated here for the signal transduction of fibroblast growth factor 2. Taken together, the present study shows that specific regions of the HD influence different aspects of HS binding, cellular localization, and enzyme function.