Members of the TGF-beta family of growth factors signal from the cell surface through serine/threonine kinase receptors. Intracellular propagation of the signal occurs by phosphorylation of intracellular proteins of the Smad family. Smad7 belongs to the subclass of inhibitory Smads that function as antagonists of TGF-beta signaling. A yeast two-hybrid screen of a human placental cDNA expression library using full-length mouse Smad7 as bait identified Yes-Associated Protein (YAP65) as a novel Smad7-interacting protein. The association of Smad7 with YAP65 was confirmed using co-expressed tagged proteins in COS-7 cells. Deletion of the PY motif of Smad7 reduced but did not abolish YAP65-Smad7 association, suggesting the existence of several interacting domains. We demonstrate that YAP65 potentiates the inhibitory activity of Smad7 against TGF-beta-induced, Smad3/4-dependent, gene transactivation. Furthermore, YAP65 augments the association of Smad7 to activated TGF-beta receptor type I (TbetaRI), whereas YAP65(1-301), which exerts a dominant-negative effect against Smad7-driven inhibition of TGF-beta signaling, reduces these interactions. Together, these data provide the first evidence that YAP65 is a Smad7 partner that facilitates the recruitment of the latter to activated TbetaRI, and enhances the inhibitory activity of Smad7 against TGF-beta signaling.