The TGF-beta/activin/BMP cytokine family signals through serine/threonine kinase receptors, but how the receptors transduce the signal is unknown. The Mad (Mothers against decapentaplegic) gene from Drosophila and the related Sma genes from Caenorhabditis elegans have been genetically implicated in signalling by members of the bone-morphogenetic-protein (BMP) subfamily. We have cloned Smad1, a human homologue of Mad and Sma. Microinjection of Smad1 messenger RNA into Xenopus embryo animal caps mimics the mesoderm-ventralizing effects of BMP4. Smad1 moves into the nucleus in response to BMP4. Smad1 has transcriptional activity when fused to a heterologous DNA-binding domain, and this activity is increased by BMP4 acting through BMP-receptor types I and II. The transactivating activity resides in the conserved carboxy-terminal domain of Smad1 and is disrupted by a nonsense mutation that corresponds to null mutations found in Mad and in the related gene DPC4, a candidate tumour-suppressor gene in human pancreatic cancer. Additionally, we show that DPC4 contains a transcriptional activation domain. The results suggests that the Smad proteins are a new class of transcription factors that mediate responses to the TGF-beta family.