Transforming growth factor-β (TGF-β) and interferon-γ (IFN-γ) have opposite effects on diverse cellular functions^,,,,, but the basis for this antagonism is not known. TGF-β signals through a receptor serine kinase that phosphorylates and activates the transcription factors Smads 2 and 3 (, ), whereas the IFN-γ receptor and its associated protein tyrosine kinase Jak1 mediate phosphorylation and activation of the transcription factor Stat1 (, , ). Here we present a basis for the integration of TGF-β and IFN-γ signals. IFN-γ inhibits the TGF β-induced phosphorylation of Smad3 and its attendant events, namely, the association of Smad3 with Smad4, the accumulation of Smad3 in the nucleus, and the activation of TGFβ-responsive genes. Acting through Jak1 and Stat1, IFN-γ induces the expression of Smad7, an antagonistic SMAD^,, which prevents the interaction of Smad3 with the TGF-β receptor. The results indicate a mechanism of transmodulation between the STAT and SMAD signal-transduction pathways.