Transforming growth factor-beta (TGF-beta) is a multifunctional growth factor that plays a critical role in tissue repair and fibrosis. Sphingolipid signaling has been shown to regulate a variety of cellular processes and has been implicated in collagen gene regulation. The present study was undertaken to determine whether endogenous sphingolipids are involved in the TGF-beta signaling pathway. TGF-beta treatment induced endogenous ceramide levels in a time-dependent manner within 5-15 min of cell stimulation. Using human fibroblasts transfected with a alpha2(I) collagen promoter/reporter gene construct (COL1A2), C(6)-ceramide (10 microm) exerted a stimulatory effect on basal and TGF-beta-induced activity of this promoter. Next, to define the effects of endogenous sphingolipids on TGF-beta signaling we employed ectopic expression of enzymes involved in sphingolipid metabolism. Sphingosine 1-phosphate phosphatase (YSR2) stimulated basal COL1A2 promoter activity and cooperated with TGF-beta in activation of this promoter. Furthermore, overexpression of YSR2 resulted in the pronounced increase of COL1A1 and COL1A2 mRNA levels. Conversely, overexpression of sphingosine kinase (SPHK1) inhibited basal and TGF-beta-stimulated COL1A2 promoter activity. These results suggest that endogenous ceramide, but not sphingosine or sphingosine 1-phosphate, is a positive regulator of collagen gene expression. Mechanistically, we demonstrate that Smad3 is a target of YSR2. TGF-beta-induced Smad3 phosphorylation was elevated in the presence of YSR2. Cotransfection of YSR2 with wild-type Smad3, but not with the phosphorylation-deficient mutant of Smad3 (Smad3A), resulted in a dramatic increase of COL1A2 promoter activity. In conclusion, this study demonstrates a direct role for the endogenous sphingolipid mediators in regulating the TGF-beta signaling pathway.