Knockout of transforming growth factor (TGF)-β1 or components of its signaling pathway leads to embryonic death in mice due to impaired yolk sac vascular development before significant smooth muscle cell (SMC) maturation occurs. Thus the role of TGF-β1 in SMC development remains unclear. Embryonic stem cell (ESC)-derived embryoid bodies (EBs) recapitulate many of the events of early embryonic development and represent a more physiological context in which to study SMC development than most other in vitro systems. The present studies showed induction of the SMC-selective genes smooth muscle α-actin (SMαA), SM22α, myocardin, smoothelin-B, and smooth muscle myosin heavy chain (SMMHC) within a mouse ESC-EB model system. Significantly, SM2, the SMMHC isoform associated with fully differentiated SMCs, was expressed. Importantly, the results showed that aggregates of SMMHC-expressing cells exhibited visible contractile activity, suggesting that all regulatory pathways essential for development of contractile SMCs were functional in this in vitro model system. Inhibition of endogenous TGF-β with an adenovirus expressing a soluble truncated TGF-β type II receptor attenuated the increase in SMC-selective gene expression in the ESC-EBs, as did an antibody specific for TGF-β1. Of interest, the results of small interfering (si)RNA experiments provided evidence for differential TGF-β-Smad signaling for an early vs. late SMC marker gene in that SMαA promoter activity was dependent on both Smad2 and Smad3 whereas SMMHC activity was Smad2 dependent. These results are the first to provide direct evidence that TGF-β1 signaling through Smad2 and Smad3 plays an important role in the development of SMCs from totipotential ESCs.