During early embryogenesis of Xenopus, dorsoventral polarity of the mesoderm is established by dorsalizing and ventralizing agents, which are presumably mediated by the activity of an activin/BVg1-like protein and Bone Morphogenetic Proteins (BMP), respectively. Interestingly, these two TGF-beta subfamilies are found in overlapping regions during mesoderm patterning. This raises the question of how the presumptive mesodermal cells recognize the multiple TGF-beta signals and differentially interpret this information to assign a particular cell fate. In this study, we have exploited the well characterized model of Xenopus mesoderm induction to determine the intracellular interactions between BMP-2/4 and activin/BVg1 signaling cascades. Using a constitutively active BMP-2/4 receptor that transduces BMP-2/4 signals in a ligand-independent fashion, we demonstrate that signals provided by activin/BVg1 and BMP modulate each other's activity and that this crosstalk occurs through intracellular mechanisms. In assays using BMP-2/4 and activin/BVg1-specific reporters, we determined that the specificity of BMP-2/4 and activin/BVg1 signaling is mediated by Smad1 and Smad2, respectively. These Smads should be considered as the mediators of the intracellular antagonism between BMP-2/4 and activin/BVg1 signaling possibly through sequestration of a limited pool of Smad4. Consistent with such a mechanism, Smad4 interacts functionally with both Smad1 and -2 to potentiate their signaling activities, and a dominant negative variant of Smad4 can inhibit both activin/BVg1 and BMP-2/4 mediated signaling Finally, we demonstrate that an activin/BVg1-dependent transcriptional complex contains both Smad2 and Smad4 and thereby provides a physical basis for the functional involvement of both Smads in TGF-beta-dependent transcriptional regulation. Thus, Smad4 plays a central role in synergistically activating activin/BVg1 and BMP-dependent transcription and functions as an intracellular sensor for TGF-beta-related signals.