Members of the Smad family of proteins are thought to play important roles in transforming growth factor beta (TGF-beta)-mediated signal transduction. In response to TGF-beta, specific Smads become inducibly phosphorylated, form heteromers with Smad4, and undergo nuclear accumulation. In addition, overexpression of specific Smad combinations can mimic the transcriptional effect of TGF-beta on both the plasminogen activator inhibitor 1 (PAI-1) promoter and the reporter construct p3TP-Lux. Although these data suggest a role for Smads in regulating transcription, the precise nuclear function of these heteromeric Smad complexes remains largely unknown. Here we show that in Mv1Lu cells Smad3 and Smad4 form a TGF-beta-induced, phosphorylation-dependent, DNA binding complex that specifically recognizes a bipartite binding site within p3TP-Lux. Furthermore, we demonstrate that Smad4 itself is a DNA binding protein which recognizes the same sequence. Interestingly, mutations which eliminate the Smad DNA binding site do not interfere with either TGF-beta-dependent transcriptional activation or activation by Smad3/Smad4 cooverexpression. In contrast, mutation of adjacent AP1 sites within this context eliminates both TGF-beta-dependent transcriptional activation and activation in response to Smad3/Smad4 cooverexpression. Furthermore, concatemerized AP1 sites, in isolation, are activated by Smad3/Smad4 cooverexpression and, to a certain extent, by TGF-beta. Taken together, these data suggest that the Smad3/Smad4 complex has at least two separable nuclear functions: it forms a rapid, yet transient sequence-specific DNA binding complex, and it potentiates AP1-dependent transcriptional activation.