Transforming growth factor (TGF)-beta plays a critical role in diabetic nephropathy. To isolate the contribution of one of the signaling pathways of TGF-beta, the Smad3 gene in the mouse was knocked out at exons 2 and 3, and the effect was studied in streptozotocin (STZ)-induced diabetes over a period of 6 wk. TGF-beta activity was increased in the diabetic mice but was not able to signal via Smad3 in the knockout (KO) mice. As expected in the wild type, the kidneys of the STZ-diabetic mice showed both structural and functional defects that are characteristic of diabetic renal involvement. In the Smad3-KO mice, however, the defects that were improved were renal hypertrophy, mesangial matrix expansion, fibronectin overproduction, glomerular basement membrane thickening, plasma creatinine, and the blood urea nitrogen. The parameters not significantly altered by the Smad3-KO were albuminuria, reduction in podocyte slit pore density, and the increase in vascular endothelial growth factor abundance and activity. It seems that the absence of Smad3 modifies the natural course of murine diabetic nephropathy, providing renal functional protection and preventing structural lesions relating to kidney hypertrophy and matrix accumulation, even though albuminuria and changes in podocyte morphology persist. In conclusion, the effects of the Smad3-KO mirror the effects of anti-TGF-beta therapy in diabetes, suggesting that the chief component of TGF-beta signaling that is relevant to kidney disease is the Smad3 pathway.