The Wnt signaling pathway is activated in most human colorectal tumors. Mutational inactivation in the tumor suppressor adenomatous polyposis coli (APC), as well as activation of beta-catenin, causes the accumulation of beta-catenin, which in turn associates with the T cell factor/lymphoid enhancer factor (TCF/LEF) family of transcription factors and activates transcription of their target genes. Here we show that beta-catenin activates transcription of the BMP and activin membrane-bound inhibitor (BAMBI)/NMA gene. The expression level of BAMBI was found to be aberrantly elevated in most colorectal and hepatocellular carcinomas relative to the corresponding non-cancerous tissues. Expression of BAMBI in colorectal tumor cell lines was repressed by a dominant-negative mutant of TCF-4 or by an inhibitor of beta-catenin-TCF interaction, suggesting that beta-catenin is responsible for the aberrant expression of BAMBI in colorectal tumor cells. Furthermore, overexpression of BAMBI inhibited the response of tumor cells to transforming growth factor-beta signaling. These results suggest that beta-catenin interferes with transforming growth factor-beta-mediated growth arrest by inducing the expression of BAMBI, and this may contribute to colorectal and hepatocellular tumorigenesis.