TGF-beta signals from the membrane to the nucleus through serine. threonine kinase receptors and their downstream effecters, termed SMAD proteins(1). The activated TGF-beta receptor induces phosphorylation of two such proteins, Smad2 and Smad3 (refs 2-6), which form hetero-oligomeric complex(es) with Smad4/DPC4 (refs 5-10) that translocate to the nucleus(2,4,5,7), where they then regulate transcriptional responses(11,12). However, the mechanisms by which the intracellular signals of TGF-beta are switched off are unclear. Here we report the identification of Smad7, which is related to Smad6 (ref. 13). Transfection of Smad7 blocks responses mediated by TGF-beta in mammalian cells, and injection of Smad7 RNA into Xenopus embryos blocks activin/TGF-beta signalling. Smad7 associates stably with the TGF-beta receptor complex, but is not phosphorylated upon TGF-beta stimulation. TGF beta-mediated phosphorylation of Smad2 and Smad3 is inhibited by Smad7, indicating that the antagonistic effect of Smad7 is exerted at this important regulatory step. TGF-beta rapidly induces expression of Smad7 mRNA, suggesting that Smad7 may participate in a negative feedback loop to control TGF-beta responses.