Smad1 mediates signaling by bone morphogenetic proteins (BMPs). In the resting state, Smad1 is found in both the nucleus and cytosol. BMP addition triggers Smad1 serine phosphorylation, binding of Smad4, and its accumulation in the nucleus. Mutations in the Smad1 N-terminal basic nuclear localization signal (NLS)-like motif, conserved among all Smad proteins, eliminated its ligand-induced nuclear translocation without affecting its other functions, including DNA binding and complex formation with Smad4. Addition of leptomycin B, an inhibitor of nuclear export, induced rapid nuclear accumulation of Smad1, whereas overexpression of CRM1, the receptor for nuclear export, resulted in Smad1 re-localization to the cytoplasm and inhibition of BMP-induced nuclear accumulation. Thus, in addition to the NLS, Smad1 also contains a functional nuclear export signal (NES). We identified a leucine-rich NES motif in the C terminus of Smad1; its disruption led to constitutive Smad1 nuclear distribution. Reporter gene activation assays demonstrated that both the NLS and NES are required for optimal transcriptional activation by Smad1. Despite its constitutive nuclear accumulation, a Smad1 NES mutant did not display higher basal reporter gene activity. We conclude that Smad1 is under constant nucleocytoplasmic shuttling conferred by its NLS and NES; nuclear accumulation after ligand-induced phosphorylation represents a change in the balance of the activities of these opposing signals and is essential for transcriptional activation.