Diabetic nephropathy is a major complication of diabetes and a leading cause of end-stage renal diseases in the U.S. Pigment epithelium-derived factor (PEDF) is a potent angiogenic inhibitor that has been extensively studied in diabetic retinopathy. Recently, we reported that PEDF is expressed at high levels in normal kidneys and that PEDF levels are decreased in kidneys of streptozotocin (STZ)-induced diabetic rats. In the present study, we injected STZ-diabetic rats with an adenovirus expressing PEDF (Ad-PEDF) to evaluate its effects in diabetes. The results showed that increased expression of PEDF in the kidney in response to Ad-PEDF delivery significantly alleviated microalbuminuria in early stages of diabetes. Administration of Ad-PEDF was found to prevent the overexpression of two major fibrogenic factors, transforming growth factor-beta (TGF-beta)1 and connective tissue growth factor (CTGF), and to significantly reduce the production of an extracellular matrix (ECM) protein in the diabetic kidney. Moreover, PEDF upregulated metalloproteinase-2 expression in diabetic kidney, which is responsible for ECM degradation. In cultured human mesangial cells, PEDF significantly inhibited the overexpression of TGF-beta1 and fibronectin induced by angiotensin II. PEDF also blocked the fibronectin production induced by TGF-beta1 through inhibition of Smad3 activation. These findings suggest that PEDF functions as an endogenous anti-TGF-beta and antifibrogenic factor in the kidney. A therapeutic potential of PEDF in diabetic nephropathy is supported by its downregulation in diabetes; its prevention of the overexpression of TGF-beta, CTGF, and ECM proteins in diabetic kidney; and its amelioration of proteinuria in diabetic rats following Ad-PEDF injection.