Activated macrophages are critical cellular participants in inflammatory disease states. Transforming growth factor (TGF)-beta1 is a growth factor with pleiotropic effects including inhibition of immune cell activation. Although the pathway of gene activation by TGF-beta1 via Smad proteins has recently been elucidated, suppression of gene expression by TGF-beta1 remains poorly understood. We found that of Smad1-Smad7, Smad3 alone was able to inhibit expression of markers of macrophage activation (inducible nitric-oxide synthase and matrix metalloproteinase-12) following lipopolysaccharide treatment in gene reporter assays. Transient and constitutive overexpression of a dominant negative Smad3 opposed the inhibitory effect of TGF-beta1. Domain swapping experiments suggest that both the Smad MH-1 and MH-2 domains are required for inhibition. Mutation of a critical amino acid residue required for DNA binding in the MH-1 of Smad3 (R74A) resulted in the loss of inhibition. Transient overexpression of p300, an interactor of the Smad MH-2 domain, partially alleviated the inhibition by TGF-beta1/Smad3, suggesting that inhibition of gene expression may be due to increased competition for limiting amounts of this coactivator. Our results have implications for the understanding of gene suppression by TGF-beta1 and for the regulation of activated macrophages by TGF-beta1.