How TGF-β1-mediated signaling pathways are finely tuned to orchestrate the generation of carcinoma-associated fibroblasts (CAFs) is poorly understood. Here, we demonstrate that miR-21 and the signaling of its target Smad 7 determine TGF-β1-induced CAF formation. In primary cultured fibroblasts, mature miR-21 increases after TGF-β1 treatment, whereas the Smad 7 protein level decreases. MiR-21 binds to the 3' UTR of Smad7 mRNA and inhibits its translation, rather than causing its degradation. Most importantly, Smad 7 is bound to Smad 2 and 3, which are thought to competitively bind to TGFBR1, and prevents their activation upon TGF-β1 stimulation. The depletion of miR-21 or the overexpression of Smad 7 blocks TGF-β1-induced CAF formation, whereas the overexpression of miR-21 or the depletion of Smad 7 promotes CAF formation, even without TGF-β1 stimulation. Collectively, these findings clearly demonstrate that miR-21 and Smad7 are critical regulators of TGF-β1 signaling during the induction of CAF formation.