Cadherins mediate cell‐cell adhesion and catenin (ctn)‐related signaling pathways. Liver fibrosis is accompanied by the loss of E‐cadherin (ECAD), which promotes the process of epithelial‐mesenchymal transition. Currently, no information is available about the inhibitory role of ECAD in hepatic stellate cell activation. Because of ECAD's potential for inhibiting the induction of transforming growth factor β1 (TGFβ1), we investigated whether ECAD overexpression prevents TGFβ1 gene induction; we also examined what the molecular basis could be. Forced expression of ECAD decreased α‐smooth muscle actin and vimentin levels and caused decreases in the constitutive and inducible expression of the TGFβ1 gene and its downstream genes. ECAD overexpression decreased Smad3 phosphorylation, weakly decreased Smad2 phosphorylation, and thus inhibited Smad reporter activity induced by either treatment with TGFβ1 or Smad3 overexpression. Overexpression of a dominant negative mutant of ras homolog gene family A (RhoA) diminished the ability of TGFβ1 to elicit its own gene induction. Consistently, transfection with a constitutively active mutant of RhoA reversed the inhibition of TGFβ1‐inducible or Smad3‐inducible reporter activity by ECAD. Studies using the mutant constructs of ECAD revealed that the p120‐ctn binding domain of ECAD was responsible for TGFβ1 repression. Consistently, ECAD was capable of binding p120‐ctn, which recruited RhoA; this prevented TGFβ1 from increasing RhoA‐mediated Smad3 phosphorylation. In the liver samples of patients with mild or severe fibrosis, ECAD expression reciprocally correlated with the severity of fibrosis. Conclusion: Our results demonstrate that ECAD inhibits Smad3/2 phosphorylation by recruiting RhoA to p120‐ctn at the p120‐ctn binding domain, whereas the loss of ECAD due to cadherin switching promotes the up‐regulation of TGFβ1 and its target genes, and facilitates liver fibrosis. (HEPATOLOGY 2010.)