Smad proteins transduce signals from TGF-beta receptors and regulate transcription of target genes. Among the latter are c-jun and junB, which encode members of the AP-1 family of transcription factors. In this study, we have investigated the functional interactions of the Smad and AP-1 transcription factors in the context of Smad-specific gene transactivation in both fibroblasts and keratinocytes. We demonstrate that overexpression of either junB or c-jun prevents TGF-beta- or Smad3-induced transactivation of the Smad-specific promoter construct (SBE)(4)-Lux. Inversely, Smad-driven promoter transactivation by TGF-beta/Smad is significantly enhanced when c-jun expression is abolished in HaCaT keratinocytes, and when junB expression is prevented in fibroblasts, consistent with the cell-type specific induction of jun members by TGF-beta. We also demonstrate that Smad-specific gene transactivation in junB(-/-) mouse embryonic fibroblasts is significantly higher than in embryonic fibroblasts from the control parental mouse line, and that this difference is abolished by rescuing junB expression in junB(-/-) cells. Finally, we have determined that off-DNA interactions between Smad3 and both c-Jun and JunB result in the reduction of Smad3/DNA interactions. From these results, we provide a model in which jun expression in response to the initial Smad cascade represents a negative feed-back mechanism counteracting Smad-driven gene transactivation.