Inhibitory Smads (I-Smads), including Smad6 and Smad7, were initially characterized as cytoplasmic antagonists in the transforming growth factor-beta signaling pathway. However, I-Smads are also localized in the nucleus. Previously, we have shown that Smad6 can function as a transcriptional co-repressor. In this study, we found both Smad6 and Smad7 interact with histone deacetylases (HDACs). Acetylation state of core histones plays a critical role in gene transcription regulation. An HDAC inhibitor, trichostatin A, released Smad6-mediated transcription repression. Moreover, class I HDACs (HDAC-1 and -3), not class II HDACs (HDAC-4, -5, and -6), were co-immunoprecipitated with Smad6. Endogenous HDAC-1 was also shown to interact with both Smad6 and Hoxc-8. Mapping of the interaction domain indicates Smad6 MH2 domain is mainly involved in recruiting HDAC-1. Most interestingly, Smad6 also binds to DNA through its MH1 domain, and the MH2 domain of Smad6 masks this binding activity, indicating that Smad6 MH1 and MH2 domains associate reciprocally and inhibit each other's function. Hoxc-8 induces Smad6 binding to DNA as a transcriptional complex. Our findings revealed that I-Smads act as antagonists in the nucleus by recruiting HDACs.