Activation of the transforming growth factor-beta (TGF-beta) system has been implicated in the pathological changes of diabetic nephropathy such as renal hypertrophy and accumulation of extracellular matrix. Streptozotocin-induced diabetic mice were used to examine whether the Smad pathway, which transduces the TGF-beta signal, is activated in the diabetic kidney, employing Southwestern histochemistry with labeled Smad-binding element (SBE) oligonucleotides and immunoblotting of nuclear protein extracts for Smad3. Mouse mesangial cells were used to study the role of Smads in mediating the effects of high glucose and TGF-beta on fibronectin expression, using transient transfections of Smad expression vectors and TGF-beta-responsive reporter assays. By Southwestern histochemistry, the binding of nuclear proteins to labeled SBE increased in both glomeruli and tubules at 1, 3, and 6 weeks of diabetes. Likewise, immunoblotting demonstrated that nuclear accumulation of Smad3 was increased in the kidney of diabetic mice. Both increases were prevented by insulin treatment. In mesangial cells, high glucose potentiated the effect of low-dose TGF-beta1 (0.2ng/ml) on the following TGF-beta-responsive constructs: 3TP-Lux (containing AP-1 sites and PAI-1 promoter), SBE4-Luc (containing four tandem repeats of SBE sequence), and the fibronectin promoter. Additionally, Smad3 overexpression increased fibronectin promoter activity, an effect that was enhanced by high ambient glucose or treatment with TGF-beta1 (2ng/ml). The TGF-beta-stimulated activity of the fibronectin promoter was prevented by transfection with either a dominant-negative Smad3 or the inhibitory Smad7. We conclude that hyperglycemia activates the intrarenal TGF-beta/Smad signaling pathway, which then promotes mesangial matrix gene expression in diabetic nephropathy.