Src interactions with the plasma membrane are an important determinant of its activity. In turn, Src activity modulates its association with the membrane through binding of activated Src to phosphotyrosylated proteins. Caveolin-1 (Cav-1), a major component of caveolae, is a known Src phosphorylation target, and both were reported to regulate cell transformation. However, the nature of Src-Cav-1 interactions, a potential mechanism of their coregulation, remained unclear. Here we used fluorescence recovery after photobleaching beam-size analysis, coimmunoprecipitation, quantitative imaging, and far-Western studies with cells expressing wild type, as well as structural and activity mutants of Src-green fluorescent protein and Cav-1-monomeric red fluorescent protein, to measure their interactions with the membrane and with each other. We show dynamic Src-plasma membrane interactions, which are augmented and stabilized by Cav-1. The mechanism involves phosphorylation of Cav-1 at Tyr-14 by Src and subsequent binding of the Src SH2 domain to phospho-Cav-1, leading to accumulation of activated Src in focal adhesions. This novel Cav-1 function potentially modulates focal adhesion dynamics.