Myostatin, a negative regulator of myogenesis, is shown to function by controlling the proliferation of myoblasts. In this study we show that myostatin is an inhibitor of myoblast differentiation and that this inhibition is mediated through Smad 3. In vitro, increasing concentrations of recombinant mature myostatin reversibly blocked the myogenic differentiation of myoblasts, cultured in low serum media. Western and Northern blot analysis indicated that addition of myostatin to the low serum culture media repressed the levels of MyoD, Myf5, myogenin, and p21 leading to the inhibition of myogenic differentiation. The transient transfection of C(2)C(12) myoblasts with MyoD expressing constructs did not rescue myostatin-inhibited myogenic differentiation. Myostatin signaling specifically induced Smad 3 phosphorylation and increased Smad 3.MyoD association, suggesting that Smad 3 may mediate the myostatin signal by interfering with MyoD activity and expression. Consistent with this, the expression of dominant-negative Smad3 rescued the activity of a MyoD promoter-reporter in C(2)C(12) myoblasts treated with myostatin. Taken together, these results suggest that myostatin inhibits MyoD activity and expression via Smad 3 resulting in the failure of the myoblasts to differentiate into myotubes. Thus we propose that myostatin plays a critical role in myogenic differentiation and that the muscular hyperplasia and hypertrophy seen in animals that lack functional myostatin is because of deregulated proliferation and differentiation of myoblasts.