The transforming growth factor-beta (TGF-beta) maintains epithelial homeostasis and suppresses early tumor formation, but paradoxically at later stages of tumor progression, TGF-beta promotes malignancy. TGF-beta activates phosphorylation of Smad2 and -3 effectors. Smad2 and -3 are known to have different functions, but differential regulation of their phosphorylation has not been described. Here we show that upon hypoxia, the TGF-beta-induced phosphorylation of Smad3 was inhibited, although Smad2 remained phosphorylated. The inhibition of Smad3 phosphorylation was not due to TGF-beta receptor inactivation. We show that Smad3 was dephosphorylated by PP2A (protein phosphatase 2A) specifically under hypoxic conditions. The hypoxic Smad3 dephosphorylation required intact expression of the essential scaffold component PR65 of PP2A. PP2A physically interacted with Smad3 that occurred only in hypoxia. Accordingly, Smad3-associated PP2A activity was found under hypoxic conditions. Hypoxia attenuated the nuclear accumulation of TGF-beta-induced Smad3 but did not affect Smad2. Moreover, the influence of TGF-beta on a set of Smad3-activated genes was attenuated by hypoxia, and this was reversed by chemical PP2A inhibition. Our data demonstrate the existence of a Smad3-specific phosphatase and identify a novel role for PP2A. Moreover, our data implicate a novel mechanism by which hypoxia regulates growth factor responses.