Smad7 and Smad6 are inhibitory Smads that block transforming growth factor-beta (TGF-beta) superfamily signal transduction. Smad7 is overexpressed in chemically induced mouse epidermal tumors, where oncogenic activation of c-ras is a frequent event. To test the role of Smad7 overexpression in tumor progression, we used retroviruses to transduce Smad7 or Smad6 and v-ras(Ha) into primary mouse keratinocytes. By itself, Smad7 transiently enhanced keratinocyte proliferation, blocked normal differentiation, and induced keratin 8, a marker of malignant conversion, but did not cause tumor formation. Smad7 extended the in vitro life span, suppressed senescence, and increased transformation frequency 3-fold of primary keratinocytes coexpressing v-ras(Ha). Smad7/v-ras(Ha) coinfected keratinocytes rapidly progressed to squamous cell carcinomas in vivo, whereas pBabe/v-ras(Ha)- or Smad6/v-ras(Ha)-transduced keratinocytes formed only benign papillomas. Smad7/v-ras(Ha) tumors had elevated proliferation and defective nuclear localizaton of Smad2, Smad3, and Smad5, whereas only Smad5 was altered in Smad6/v-ras(Ha) tumors. Smad7 overexpression in vitro induced epidermal growth factor (EGF)-like growth factors TGF-alpha, heparin binding-EGF, amphiregulin, and EGF receptor tyrosine phosphorylation as well as the EGF-CFC growth factor cripto-1. TGF-alpha and cripto-1 were also overexpressed in Smad7/v-ras(Ha) tumors. These results suggest that Smad7 overexpression accelerates tumor progression through inhibition of TGF-beta superfamily signaling and up-regulation of the EGF-like superfamily of growth factors. This is the first demonstration that Smad7 overexpression can cause malignant conversion in a multistage cancer model and suggests that it may have an important role in the pathogenesis of human cancer.