Kaposi's sarcoma-associated herpesvirus (KSHV) is the etiological agent of Kaposi's sarcoma (KS), a malignancy commonly found in AIDS patients. Whether KS is a true neoplasm or hyperplasia has been a subject of intensive debate until recently when KSHV is unequivocally shown to efficiently infect, immortalize and transform rat primary mesenchymal precursor cells (MM). Moreover, KSHV-transformed MM cells (KMM) efficiently induce tumors with hallmark features of KS when inoculated into nude mice. Here, we showed Smad1 as a novel binding protein of KSHV latency-associated nuclear antigen (LANA). LANA interacted with and sustained BMP-activated p-Smad1 in the nucleus and enhanced its loading on the Id promoters. As a result, Ids were significantly up-regulated in KMM cells and abundantly expressed in human KS lesions. Strikingly, genetic and chemical inhibition of the BMP-Smad1-Id pathway blocked the oncogenic phenotype of KSHV-transformed cells in vitro and in vivo. These findings illustrate a novel mechanism by which a tumor virus hijacks and converts a developmental pathway into an indispensable oncogenic pathway for tumorigenesis. Importantly, our results demonstrate the efficacy of targeting the BMP-Smad1-Id pathway for inhibiting the growth of KSHV-induced tumors, and therefore identify the BMP pathway as a promising therapeutic target for KS.