Recent studies have demonstrated that bone marrow-derived fibroblasts contribute significantly to the pathogenesis of renal fibrosis. However, the signaling mechanisms underlying the activation of bone marrow-derived fibroblasts in the kidney are incompletely understood. As TGF-β1/Smad3 signaling has been shown to have an important role in the pathogenesis of kidney fibrosis, we investigated the role of Smad3 in the activation of bone marrow-derived fibroblasts in the kidney following obstructive injury using Smad3-knockout mice and Smad3-null monocytes. Compared with wild-type mice, Smad3-knockout mice accumulated significantly fewer bone marrow-derived fibroblasts in the kidney after obstructive injury. Furthermore, Smad3-knockout mice exhibited less myofibroblast activation and expressed less α-SMA in the obstructed kidney. Consistent with these findings, genetic deletion of Smad3 reduced total collagen deposition and suppressed the expression of extracellular matrix proteins. Moreover, wild-type mice engrafted with Smad3(-/-) bone marrow cells displayed fewer bone marrow-derived fibroblasts in the kidney with obstructive injury and showed less severe renal fibrosis compared with wild-type mice engrafted with Smad3(+/+) bone marrow cells. In cultured monocytes, TGF-β1 induced phosphorylation of Smad3 and Smad3 deficiency abolished TGF-β1-induced expression of α-SMA and extracellular matrix proteins. Taken together, our results demonstrate that Smad3 signaling has an essential role in the activation of bone marrow-derived fibroblasts in the kidney during the pathogenesis of renal fibrosis.