Transforming growth factor beta (TGF-beta)/bone morphogenetic protein (BMP) family ligands interact with specific membrane receptor complexes that have serine/threonine kinase activities. The receptor phosphorylation and activation induced by the ligands leads to phosphorylation of the Smad proteins, which translocate to the nucleus, controlling gene expression. Thus, regulation of Smad proteins is a key step in TGF-beta/BMP-induced signal transduction. Here we report a novel mechanism of the regulation of SMAD-mediated signaling, by which the Smad1 protein level is controlled through expression of the CHIP protein. CHIP is a U-box-dependent E3 ubiquitin ligase, previously identified as a cochaperon protein. However, we have isolated CHIP as a Smad-interacting protein in a yeast two-hybrid screen using Smad1 as bait. Furthermore we have shown CHIP-Smad interaction using the (35)S-labeled CHIP protein, which can interact with glutathione S-transferase (GST)-Smad1 and GST-Smad4 in an in vitro protein-binding assay. The CHIP-Smad interaction has been confirmed in vivo in mammalian cells through coimmunoprecipitation. Interestingly, we demonstrate that the coexpression of Smad1 and Smad4 with the CHIP protein results in the degradation of the Smad proteins through a ubiquitin-mediated process. Consistent with the observation that CHIP induces Smad1 degradation, we further show that the expression of CHIP can inhibit the transcriptional activities of the Smad1/Smad4 complex induced by BMP signals. Intriguingly, pBS/U6/CHIPi, which diminishes CHIP expression, significantly enhanced Smad1/Smad4- or BMPRIB(QD)-induced gene transcription. These results suggest that CHIP can interact with the Smad1/Smad4 proteins and block BMP signal transduction through the ubiquitin-mediated degradation of Smad proteins.