Activation of vascular smooth muscle cells (VSMCs) by proinflammatory cytokines is a key feature of atherosclerotic lesion formation. Transforming growth factor (TGF)-beta1 is a pleiotropic growth factor that can modulate the inflammatory response in diverse cell types including VSMCs. However, the mechanisms by which TGF-beta1 is able to mediate these effects remains incompletely understood. We demonstrate here that the ability of TGF-beta1 to inhibit markers of VSMC activation, inducible nitric-oxide synthase (iNOS) and interleukin (IL)-6, is mediated through its downstream effector Smad3. In reporter gene transfection studies, we found that among a panel of Smads, Smad3 could inhibit iNOS induction in an analogous manner as exogenous TGF-beta1. Adenoviral overexpression of Smad3 potently repressed inducible expression of endogenous iNOS and IL-6. Conversely, TGF-beta1 inhibition of cytokine-mediated induction of iNOS and IL-6 expression was completely blocked in Smad3-deficient VSMCs. Previous studies demonstrate that CCAAT/enhancer-binding protein (C/EBP) and NF-kappaB sites are critical for cytokine induction of both the iNOS and IL-6 promoters. We demonstrate that the inhibitory effect of Smad3 occurs via a novel antagonistic effect of Smad3 on C/EBP DNA-protein binding and activity. Smad3 mediates this effect in part by inhibiting C/EBP-beta and C/EBP-delta through distinct mechanisms. Furthermore, we find that Smad3 prevents the cooperative induction of the iNOS promoter by C/EBP and NF-kappaB. These data demonstrate that Smad3 plays an essential role in mediating TGF-beta1 anti-inflammatory response in VSMCs.