Smad family proteins are essential for transforming growth factor beta (TGF-beta) signal mediation downstream of a heteromeric complex of the type I and type II receptor serine/threonine kinases. A distant family member, Smad7, is expressed in most mammalian tissues and cells and prevents TGF-beta signaling. In this study, we examined the physiologic role of Smad7 in mediating the effects of activin, a member of the TGF-beta superfamily of peptides that functions in a number of processes, including blood-cell development. We report here that Smad7 expression is specifically absent in particular hematopoietic cells that respond to activin by differentiating into the erythroid lineage and that ectopic production of Smad7 causes mouse erythroid leukemia (F5-5) cells to become resistant to activin induction of erythroid differentiation. When coexpressed with type I activin receptor ActR-I or ActR-IB in concert with type II receptor ActR-II, Smad7 efficiently reduced an early transcriptional response mediated by ActR-I but had only a minimal effect on the response mediated by ActR-IB. In the presence of Smad7, overexpression of an activated form of ActR-IB, but not of an activated form of ActR-I, induced F5-5 cells to differentiate. These results suggest that Smad7 selectively interferes with the ActR-I pathway in activin signal transduction. The findings also indicate the existence of a novel activity of Smad7 that inhibits erythroid differentiation by blocking intracellular signaling of activin.