Transforming growth factor-beta (TGF-beta) represses surfactant protein B (Sp-B) gene transcription through a mechanism that remains unknown. A homeodomain and a forkhead transcription factor, NKX2.1 and HNF-3, respectively, are known activators of Sp-B transcription. Because SMADs are the effectors of TGF-beta-induced gene activation, we examined the possibility that gene repression by TGF-beta may also occur through interactions of SMADs with NKX2.1 and HNF-3. We found that lung epithelial carcinoma H441 cells contain SMAD2/3 and -4, which localize to the nucleus in response to TGF-beta treatment. The activity of a transfected Sp-B promoter/reporter construct was reduced in a dose-dependent manner by TGF-beta. Cotransfection with a mutant, constitutively activated form of the Tgf-beta type I receptor repressed Sp-B promoter activity in the absence of TGF-beta ligand. Dominant negative mutants of Smads blocked the repressor activity of TGF-beta. SMAD3, but not SMAD2, mediated the repressor activity of TGF-beta on the Sp-B promoter. Mutations within a 70-base pair domain that includes binding sites for NKX2.1, hepatocyte nuclear factor 3 (HNF-3), or cAMP response element-binding protein (CREB) eliminated SMAD3-dependent repression of Sp-B transcription. Electrophoretic mobility shift analysis showed no evidence for direct binding of SMAD3 to the Sp-B promoter, and a DNA binding mutant of SMAD3 also repressed Sp-B, suggesting that direct DNA binding of SMAD3 may not be required. Using a mammalian two hybrid assay, we found physical and functional interactions between SMAD3 and both NKX2.1 and HNF-3. Also, a glutathione S-transferase-fused SMAD3 directly binds to in vitro synthesized NKX2.1 or HNF-3, demonstrating protein-protein interactions between SMAD3 and the two transcriptional factors. The DNA binding of NKX2.1 to Sp-B promoter was reduced in response to TGF-beta treatment, although expression of Nkx2.1 was not affected. We conclude that SMAD3 interactions with the positive regulators NKX2.1 and HNF-3 underlie the molecular basis for TGF-beta-induced repression of Sp-B gene transcription.