Transforming growth factor beta (TGFbeta) activates transcription of the plasminogen activator inhibitor type-1 (PAI-1) gene through a major TGFbeta-responsive region (-740 and -647) in the PAI-1 promoter. This process requires the Smad family of signaling molecules. Upon phosphorylation by the TGFbeta receptors, Smad2 and Smad3 homoligomerize and heteroligomerize with Smad4, translocate to the nucleus and activate transcription of TGFbeta responsive genes. Smad3 and Smad4 have been shown to bind to various sites in the PAI-1 promoter. To determine the number of Smad-binding sites within the 94-base pair major TGFbeta-responsive region and the mechanism of Smad-mediated transactivation, we systematically mapped the Smad-binding sites and show that Smad4 and Smad3 bind cooperatively to two adjacent DNA elements in this region. Both elements were required for TGFbeta-induced, Smad3- and Smad4-dependent activation of PAI-1 transcription. Contrary to previous reports, transactivation of the PAI-1 promoter was mediated by the amino- but not carboxyl-terminal domains of the Smads. Furthermore, oligomerization of Smad3 markedly enhanced its binding to the two binding sites. Finally, a Smad4 mutation identified in a human pancreatic carcinoma that inactivates Smad4 signaling abolished Smad4 DNA binding activity, hence preventing transactivation of TGFbeta-responsive genes. These results underscore the importance of the Smad4 DNA binding activity in controlling cell growth and carcinogenesis.