Transforming growth factor beta (TGF-beta) is a growth-inhibitory cytokine for epithelial cells. In the mouse multistage skin carcinogenesis model, defects in TGF-beta 1 signaling reduce senescence in vitro and accelerate malignant progression in vivo. However, the precise postreceptor signaling pathways and specific roles played by Smad proteins in this process have not been defined. Here we show that senescence of v-ras(Ha)-transduced Smad3 null keratinocytes is delayed, whereas overexpression of Smad3, but not Smad2 or Smad4, induced senescence. The TGF-beta 1 target genes c-myc and p15(ink4b) were deregulated in the absence of Smad3. When transplanted to a graft site on nude mice, the v-ras(Ha)-transduced Smad3 null keratinocytes underwent rapid conversion from benign papilloma to malignant carcinoma, whereas wild-type keratinocytes predominantly formed papillomas. These results link Smad3-mediated regulation of growth control genes to senescence in vitro and tumor suppression in vivo.