Smad2 and Smad4 are related tumour-suppressor proteins, which, when stimulated by the growth factor TGF-beta, form a complex to inhibit growth. The effector function of Smad2 and Smad4 is located in the conserved carboxy-terminal domain (C domain) of these proteins and is inhibited by the presence of their amino-terminal domains (N domain). This inhibitory function of the N domain is shown here to involve an interaction with the C domain that prevents the association of Smad2 with Smad4. This inhibitory function is increased in tumour-derived forms of Smad2 and 4 that carry a missense mutation in a conserved N domain arginine residue. The mutant N domains have an increased affinity for their respective C domains, inhibit the Smad2-Smad4 interaction, and prevent TGF beta-induced Smad2-Smad4 association and signalling. Whereas mutations in the C domain disrupt the effector function of the Smad proteins, N-domain arginine mutations inhibit SMAD signalling through a gain of autoinhibitory function. Gain of autoinhibitory function is a new mechanism for inactivating tumour suppressors.