TGFbeta inducible early gene (TIEG) encodes a three zinc-finger Krüppel-like transcription factor whose overexpression has been shown to mimic the effects of TGFbeta in human osteosarcoma and pancreatic carcinoma cells. In order to investigate a potential role of TIEG in the TGFbeta signal transduction pathway, we studied its impact on a Smad binding element (SBE) reporter which is known to be regulated by TGFbeta through the R-Smad proteins. We demonstrate that TIEG overexpression enhances TGFbeta induction of SBE reporter activity. TIEG overexpression also enhances induction of the endogenous TGFbeta regulated genes p21 and PAI-1. The ability of TIEG to enhance TGFbeta actions is Smad dependent since TIEG has no effect on SBE transcription in the absence of Smad4 expression or when an inhibitory Smad protein, Smad7, is overexpressed. Furthermore, TIEG overexpression enhances TGFbeta induced Smad2 phosphorylation. Lastly, TIEG appears to function by binding to and thereby repressing a specific element in the proximal promoter of the inhibitory Smad7 gene. In conclusion, these results describe a novel mechanism for the potentiation of TGFbeta/Smad signaling via repression of the inhibitory Smad7 gene by TIEG.