Members of the Smad family of intracellular signal transducers are essential for transforming growth factor-beta (TGF-beta) to exert its multifunctional effects. After activation of TGF-beta receptors, Smad2 and Smad3 become phosphorylated and form heteromeric complexes with Smad4. Thereafter, these activated Smad complexes translocate to the nucleus, where they may direct transcriptional responses. Here we report that TGF-beta mediates phosphorylation of Smad2 at two serine residues in the C terminus, i.e. Ser465 and Ser467, which are phosphorylated in an obligate order; phosphorylation of Ser465 requires that Ser467 be phosphorylated. Transfection of Smad2 with mutation of Ser465 and/or Ser467 to alanine residues into Mv1Lu cells resulted in dominant-negative inhibition of TGF-beta signaling. These Smad2 mutants were found to stably interact with an activated TGF-beta receptor complex, in contrast to wild-type Smad2, which interacts only transiently. Mutation of Ser465 and Ser467 in Smad2 abrogated complex formation of this mutant with Smad4 and blocked the nuclear accumulation not only of Smad2, but also of Smad4. Thus, heteromeric complex formation of Smad2 with Smad4 is required for nuclear translocation of Smad4. Moreover, peptides from the C terminus of Smad2 containing phosphorylated Ser465 and Ser467 were found to bind Smad4 in vitro, whereas the corresponding unphosphorylated peptides were less effective. Thus, phosphorylated Ser465 and Ser467 in Smad2 may provide a recognition site for interaction with Smad4, and phosphorylation of these sites is a key event in Smad2 activation.