Transforming growth factor beta (TGF-beta) induces both apoptosis and cell-cycle arrest in some cell lines, but only growth arrest in others. It is not clear how this differential response to TGF-beta is specified. Smad proteins are critical mediators of TGF-beta signalling. After stimulation by TGF-beta, Smad2 and Smad3 become phosphorylated by the activated TGF-beta receptor kinases, oligomerize with Smad4, translocate to the nucleus and regulate the expression of TGF-beta target genes. Here we report that the sensitivity to TGF-beta induced apoptosis is regulated by crosstalk between the Akt/PKB serine/threonine kinase and Smad3 through a mechanism that is independent of Akt kinase activity. Akt interacts directly with unphosphorylated Smad3 to sequester it outside the nucleus, preventing its phosphorylation and nuclear translocation. This results in inhibition of Smad3-mediated transcription and apoptosis. Furthermore, the ratio of Smad3 to Akt correlates with the sensitivity of cells to TGF-beta induced apoptosis. Alteration of this ratio changes the apoptotic, but not the growth-inhibitory, responses of cells to TGF-beta. These findings identify an important determinant of sensitivity to TGF-beta-induced apoptosis that involves crosstalk between the TGF-beta and phosphatidylinositol-3-OH kinase (PI(3)K) pathways.