Disease associated gene deficient embryonic stem cells can serve as valuable in vitro models to study disease mechanisms and screen drugs. Smad3 mediated TGF-β/Activin/Nodal signaling plays important roles in many biological processes. Despite numerous studies regarding Smad3 function, the role of Smad3 in mouse ES cells is not well studied. To understand the function of Smad3 in mouse ES cells, we derived Smad3-/- ES cells and wild type ES cells. Smad3-/- ES cells display no defect on self-renewal. They express similar level of pluripotent genes and lineage genes compared to wild type ES cells. However, Smad3 ablation results in transient difference in germ layer marker expression during embryoid body formation. Mesoderm lineage marker expression is significantly reduced in the embryoid body formed by Smad3-/- ES cells compared to wild type ES cells. Intriguingly, subcutaneous injection of Smad3-/- ES cells into nude mice leads to formation of malignant immature teratomas, whilst wild type ES cells tend to form mature teratomas. Smad3-/- ES cell formed teratomas can therefore provide a new model for the study of the mechanism of malignant teratomas.