The process of adipocyte differentiation is driven by a highly coordinated cascade of transcriptional events that results in the development of the mature adipocyte and in lipid accumulation. One of the early events of differentiation is the up-regulation of CCAAT/enhancer-binding protein beta (C/EBPbeta) expression. C/EBPbeta then acts to up-regulate the expression of adipogenic factors such as C/EBPalpha, which control the late stage of adipogenesis. Retinoic acid (RA) is a potent inhibitor of adipogenesis, and its action appears to block C/EBPbeta transcriptional potential early during differentiation. Using preadipocytes and mesenchymal stem cell models, we show that RA specifically blocks the occupancy of C/EBPbeta of the Cebpa promoter, thereby abrogating the differentiation process. RA does not act directly on C/EBPbeta but rather stimulates the expression of the transforming growth factor beta-effector protein Smad3, which can interact with C/EBPbeta via its Mad homology 1 domain and can interfere with C/EBPbeta DNA binding. The RA-induced increase in Smad3 expression results in increased cytoplasmic and nuclear Smad3, an important event as ectopic expression of Smad3 in preadipocytes in the absence of RA treatment only modestly inhibits adipogenesis and C/EBPbeta DNA binding, suggesting that Smad3 alone is not sufficient to completely recapitulate the effects of retinoic acid treatment during differentiation. However, in the absence of Smad3, RA is not able to inhibit adipocyte differentiation or to elicit a decrease in C/EBPbeta DNA occupancy suggesting that Smad3 is necessary to convey the inhibitory effects of retinoic acid during adipogenesis.