Transforming growth factor-beta (TGF-beta) and interferon-gamma (IFN-gamma) have opposite effects on diverse cellular functions(1-5), but the basis for this antagonism is not known(6). TGF-beta signals through a receptor serine kinase that phosphorylates and activates the transcription factors Smads 2 and 3 (refs 7, 8), whereas the IFN-gamma receptor and its associated protein tyrosine kinase Jak1 mediate phosphorylation and activation of the transcription factor Stat1 (refs 6, 9, 10). Here we present a basis for the integration of TGF-beta and IFN-gamma signals. IFN-gamma inhibits the TGF beta-induced phosphorylation of Smad3 and its attendant events, namely, the association of Smad3 with Smad4, the accumulation of Smad3 in the nucleus, and the activation of TGF beta-responsive genes. Acting through Jak1 and Stat1, IFN-gamma induces the expression of Smad7, an antagonistic SMAD(11,12), which prevents the interaction of Smad3 with the TGF-beta receptor. The results indicate a mechanism of transmodulation between the STAT and SMAD signal-transduction pathways.