Transforming growth factor-beta (TGF-beta) is an important regulator of physiological connective tissue biosynthesis and plays a central role in pathological tissue fibrosis. Previous studies have established that a biologically active lipid mediator, sphingosine 1-phosphate (S1P), mimics some of the profibrotic functions of TGF-beta through cross-activation of Smad signaling. Here we report that another product of sphingosine kinase, dihydrosphingosine 1-phosphate (dhS1P), has an opposite role in the regulation of TGF-beta signaling. In contrast to S1P, dhS1P inhibits TGF-beta-induced Smad2/3 phosphorylation and up-regulation of collagen synthesis. The effects of dhS1P require a lipid phosphatase, PTEN, a key modulator of cell growth and survival. dhS1P stimulates phosphorylation of the C-terminal domain of PTEN and its subsequent translocation into the nucleus. We demonstrate a novel function of nuclear PTEN as a co-factor of the Smad2/3 phosphatase, PPM1A. Complex formation of PTEN with PPM1A does not require the lipid phosphatase activity but depends on phosphorylation of the serine/threonine residues located in the C-terminal domain of PTEN. Upon complex formation with PTEN, PPM1A is protected from degradation induced by the TGF-beta signaling. Consequently, overexpression of PTEN abrogates TGF-beta-induced Smad2/3 phosphorylation. This study establishes a novel role for nuclear PTEN in the stabilization of PPM1A. PTEN-mediated cross-talk between the sphingolipid and TGF-beta signaling pathways may play an important role in physiological and pathological TGF-beta signaling.