Even though myelodysplastic syndromes (MDS) are characterized by ineffective hematopoiesis, the molecular alterations that lead to marrow failure have not been well elucidated. We have previously shown that the myelosuppressive TGF-β pathway is constitutively activated in MDS progenitors. Because there is conflicting data about upregulation of extracellular TGF-β levels in MDS, we wanted to determine the molecular basis of TGF-β pathway overactivation and consequent hematopoietic suppression in this disease. We observed that SMAD7, a negative regulator of TGF-β receptor I (TBRI) kinase, is markedly decreased in a large meta-analysis of gene expression studies from MDS marrow-derived CD34⁺ cells. SMAD7 protein was also found to be significantly decreased in MDS marrow progenitors when examined immunohistochemically in a bone marrow tissue microarray. Reduced expression of SMAD7 in hematopoietic cells led to increased TGF-β–mediated gene transcription and enhanced sensitivity to TGF-β–mediated suppressive effects. The increased TGF-β signaling due to SMAD7 reduction could be effectively inhibited by a novel clinically relevant TBRI (ALK5 kinase) inhibitor, LY-2157299. LY-2157299 could inhibit TGF-β–mediated SMAD2 activation and hematopoietic suppression in primary hematopoietic stem cells. Furthermore, in vivo administration of LY-2157299 ameliorated anemia in a TGF-β overexpressing transgenic mouse model of bone marrow failure. Most importantly, treatment with LY-2157199 stimulated hematopoiesis from primary MDS bone marrow specimens. These studies demonstrate that reduction in SMAD7 is a novel molecular alteration in MDS that leads to ineffective hematopoiesis by activating of TGF-β signaling in hematopoietic cells. These studies also illustrate the therapeutic potential of TBRI inhibitors in MDS. Cancer Res; 71(3); 955–63. ©2010 AACR.