Transforming growth factor beta (TGF-beta) is a potent natural antiproliferative agent that plays an important role in suppressing tumorigenicity. In numerous tumors, loss of TGF-beta responsiveness is associated with inactivating mutations that can occur in components of this signaling pathway, such as the tumor suppressor Smad2. Although a general framework for how Smads transduce TGF-beta signals has been proposed, the physiological relevance of alterations of Smad2 functions in promoting tumorigenesis is still unknown. Here, we show that expression of Smad2.P445H, a tumor-derived mutation of Smad2 found in human cancer, suppresses the ability of the Smads to mediate TGF-beta-induced growth arrest and transcriptional responses. Smad2.P445H is phosphorylated by the activated TGF-beta receptor at the carboxy-terminal serine residues and associates with Smad3 and Smad4 but is unable to dissociate from the receptor. Upon ligand-induced phosphorylation, Smad2.P445H interacts stably with wild-type Smad2, thereby blocking TGF-beta-induced nuclear accumulation of wild-type Smad2 and Smad2-dependent transcription. The ability of the Smad2.P445H to block the nuclear accumulation of wild-type Smad2 protein reveals a new mechanism for loss of sensitivity to the growth-inhibitory functions of TGF-beta in tumor development.