Dpc4 (Smad4) is implicated in mediation of signals from transforming growth factor (TGF) beta and related ligands, and wild-type Dpc4 mediates TGF-beta-stimulated gene transcription at specific DNA sequences bound by Dpc4 [Smad binding element (SBE)]. We characterized panels of DPC4 tumor mutations and cancer cell lines. Amino acid substitutions within the NH2-terminal third of Dpc4 weakened or ablated SBE-mediated gene regulation by a disruption of DNA binding. An interaction of the COOH-terminal end with the DNA-binding domain of Dpc4 was evident but was not required to explain the functional impairment produced by NH2-terminal DPC4 mutations. Both substitution and truncation mutations of the COOH-terminal half of DPC4 lacked the ability to regulate transcription while retaining the sequence-specific DNA-binding function, but through differing mechanisms. A modular domain to redistribute Dpc4 to the nuclear compartment allowed SBE-mediated transcriptional activation in a cell line having a TGF-1 receptor defect and was sufficient to restore SBE-mediated transactivation ability to COOH-terminal DPC4 missense mutants. Cells harboring DPC4 alterations had a universal impairment of the TGF-beta-stimulated SBE transcriptional response. These studies identify the loss of SBE-mediated gene regulation as a uniform outcome of the selection for DPC4 alterations during tumorigenesis. They raise the possibility of restoration of some Dpc4-associated transcriptional events in cancer cells through the targeted redistribution of wild-type and some missense mutant forms of Dpc4 to the nucleus.