Smad proteins are critical intracellular signaling mediators for the transforming growth factor beta (TGFbeta) superfamily. Here, we report that Erbin (for "ErbB2/Her2-interacting protein"), which contains leucine-rich repeats and a PDZ (PSD-95/DLG/ZO-1) domain, interacts specifically with Smad3 and, to a lesser extent, with Smad2 through a novel Smad-interacting domain (SID) adjacent to its PDZ domain. Increased expression of Erbin does not affect the level of TGFbeta-induced phosphorylation of Smad2/Smad3, but it physically sequesters Smad2/Smad3 from their association with Smad4 and hence negatively modulates TGFbeta-dependent transcriptional responses and cell growth inhibition. An isoform of Erbin encoded by an alternatively spliced transcript in human tissues lacks this SID and fails to inhibit TGFbeta responses. Consistently, knockdown of the endogenous Erbin gene with short hairpin RNA enhances TGFbeta-induced antiproliferative and transcriptional responses. In addition, Erbin suppresses activin/Smad2-dependent, but not BMP/Smad1-mediated, induction of endogenous gene expression in Xenopus embryos. Therefore, these results define Erbin as a novel negative modulator of Smad2/Smad3 functions and expand the physiological role of Erbin to the regulation of TGFbeta signaling.