Protease-activated receptor-1 (PAR₁) is a G-protein–coupled receptor uniquely activated by proteolysis. Thrombin, a coagulant protease, induces inflammatory responses and endothelial barrier permeability through the activation of PAR₁. Activated protein C (APC), an anti-coagulant protease, also activates PAR₁. However, unlike thrombin, APC elicits anti-inflammatory responses and protects against endothelial barrier dysfunction induced by thrombin. We found that thrombin and APC signaling were lost in PAR₁-deficient endothelial cells, indicating that PAR₁ is the major effector of protease signaling. To delineate the mechanism responsible for protease-selective signaling by PAR₁, we examined the effect of APC and thrombin on the activation of RhoA and Rac1, small GTPases that differentially regulate endothelial barrier permeability. Thrombin caused robust RhoA signaling but not Rac1 activation, whereas APC stimulated a marked increase in Rac1 activation but not RhoA signaling, consistent with the opposing functions of these proteases on endothelial barrier integrity. Strikingly, APC signaling and endothelial barrier protection effects were abolished in cells lacking caveolin-1, whereas thrombin signaling remained intact. These findings suggest that compartmentalization of PAR₁ in caveolae is critical for APC selective signaling to Rac1 activation and endothelial barrier protection. We further report that APC induces PAR₁ phosphorylation and desensitizes endothelial cells to thrombin signaling but promotes limited receptor cleavage and negligible internalization and degradation even after prolonged APC exposure. Thus, APC selective signaling and endothelial barrier protective effects are mediated through compartmentalization of PAR₁ in caveolae and a novel mechanism of PAR₁ signal regulation.