The NF2 gene encodes a tumor suppressor protein known as merlin or schwannomin whose loss of function causes Neurofibromatosis Type 2 (NF2). NF2 is characterized by the development of benign tumors, predominantly schwannomas, in the peripheral nervous system. Merlin links plasma membrane receptors with the actin cytoskeleton and its targeting to the plasma membrane depends on direct binding to the paxillin scaffold protein. Exon 2 of NF2, an exon mutated in NF2 patients and deleted in a mouse model of NF2, encodes the merlin paxillin binding domain (PBD1). Here, we sought to determine the role of PBD1 in regulation of merlin stability and association with plasma membrane receptors and the actin cytoskeleton in Schwann cells. Using a fluorescence-based pulse-chase technique, we measured the half-life of Halo-tagged merlin variants carrying PBD1, exon 2, and exons 2 and 3 deletions in transiently transfected Schwann cells. We found that PBD1 alone was necessary and sufficient to increase merlin's half-life from approximately three to eleven hours. Merlin lacking PBD1 did not form a complex with surface β1 integrins or associate with the actin cytoskeleton. In addition, direct binding studies using purified merlin and paxillin domains revealed that merlin directly binds paxillin LD3 (leucine-aspartate 3) domain as well as the LD4 and LD5 domains. Together these results demonstrate that a direct interaction between merlin PBD1 and the paxillin LD3-5 domains targets merlin to the plasma membrane where it is stabilized by its association with surface β1 integrins and cortical actin.