Smad proteins are the key effectors of the transforming growth factor beta (TGFbeta) signaling pathway in mammalian cells. The importance of Smads for human physiology is documented by the identification and characterization of mutations that are frequently found in cancer patients. In the present study we have functionally characterized such a tumorigenic mutation in Smad4 (E330A) and shown that this mutant as well as a Smad3 mutant bearing the corresponding mutation (Smad3 E239A) failed to activate transcription in response to TGFbeta stimulation because of defects in homo-and hetero-oligomerization. In the case of Smad3, the E239A mutation also abolished the phosphorylation by the TGFbeta type I receptor (ALK5). Examination of the previously published crystal structure of a Smad3/Smad4 MH2 heterotrimer [Protein Data Bank accession code, 1U7F] showed that (a) residue E239 in Smad3 participates in a dense network of intermolecular hydrogen bond and ionic interactions with other conserved polar residues such as Y237 of beta1 strand, N276 and R279 of L2 loop, and R287 of helix H1; (b) residue R287 in Smad3 is also involved in intermolecular interactions by making hydrogen and ionic bonds with Y364 in Smad3 and D493 in Smad4, an amino acid residue that is also frequently mutated in cancer patients (mutation D493H). To investigate the contribution of these interactions to Smad function and TGFbeta signaling, we replaced two of these polar residues (R287 and Y237) with a nonpolar residue (alanine) and functionally characterized the resulting Smad3 mutants. Our analysis showed that Smad3 mutant R287A was phosphorylated by the ALK5 receptor but was unable to form homo-oligomers or hetero-oligomers with Smad4 and activate transcription whereas mutation Y237A had a wild type phenotype. In summary, our present work provides a molecular basis for the functional inactivation of the TGFbeta pathway in patients bearing previously uncharacterized mutations in Smad4 as well as new information regarding the importance of conserved polar amino acids for the structure and function of the MH2 domain of Smads.