Transforming growth factor beta (TGFbeta) regulates transcriptional responses via activation of cytoplasmic effector proteins termed Smads. Following their phosphorylation by the type I TGFbeta receptor, Smads form oligomers and translocate to the nucleus where they activate the transcription of TGFbeta target genes in cooperation with nuclear cofactors and coactivators. In the present study, we have undertaken a deletion analysis of human Smad3 protein in order to characterize domains that are essential for transcriptional activation in mammalian cells. With this analysis, we showed that Smad3 contains two domains with transcriptional activation function: the MH2 domain and a second middle domain that includes the linker region and the first two beta strands of the MH2 domain. Using a protein-protein interaction assay based on biotinylation in vivo, we were able to show that a Smad3 protein bearing an internal deletion in the middle transactivation domain is characterized by normal oligomerization and receptor activation properties. However, this mutant has reduced transactivation capacity on synthetic or natural promoters and is unable to interact physically and functionally with the histone acetyltransferase p/CAF. The loss of interaction with p/CAF or other coactivators could account, at least in part, for the reduced transactivation capacity of this Smad3 mutant. Our data support an essential role of the previously uncharacterized middle region of Smad3 for nuclear functions, such as transcriptional activation and interaction with coactivators.