Signals by cytokines of the transforming growth factor-beta (TGF-beta) superfamily are negatively regulated by inhibitory Smads (I-Smads). Smad7 inhibits signaling by both TGF-beta and bone morphogenetic proteins (BMPs), whereas Smad6 inhibits TGF-beta signals less effectively. I-Smads have amino-terminal N domains and carboxyl-terminal Mad homology 2 (MH2) domains. The N domains are essential for specific inhibition of TGF-beta signaling by Smad7, whereas the MH2 domains of I-Smads are involved in the inhibition of TGF-beta superfamily signals through interaction with type I receptors. Here, we have identified four basic amino acid residues (Lys-312, Lys-316, Lys-401, and Arg-409) in the basic surface of the Smad7 MH2 domain that play important roles in interaction with type I receptors. Mutations of the four basic amino acid residues to acidic residues (K312E, K316E, K401E, and R409E) abolished the interaction of Smad7 with TGF-beta type I receptors, inhibition of Smad2 phosphorylation and transcriptional responses induced by TGF-beta, and induction of target genes of endogenous activin/Nodal signals in Xenopus early embryos. The K401E and R409E mutants of Smad7 were also unable to interact with BMP type I receptors (BMPR-I), repress the Smad5 phosphorylation and transcription induced by BMP, and effectively inhibit endogenous BMP signals in Xenopus early embryos. However, the K312E and K316E mutants were able to interact with BMPR-I and retained the ability to inhibit BMP signaling. Thus, the MH2 domain of Smad7 plays important roles in specific inhibition of TGF-beta superfamily signals through differential interaction with type I receptors.