Homeostasis of Smad phosphorylation at its C-terminal SXS motif is essential for transforming growth factor beta (TGFbeta) signaling. Whereas it is known that TGFbeta signaling can be terminated by phosphatases, which dephosphorylate R-Smads in the nucleus, it is unclear whether there are any cytoplasmic phosphatase(s) that can attenuate R-Smad phosphorylation and nuclear translocation. Here we demonstrate that myotubularin-related protein 4 (MTMR4), a FYVE domain-containing dual-specificity protein phosphatase (DSP), attenuates TGFbeta signaling by reducing the phosphorylation level of R-Smads in early endosomes. Co-immunoprecipitation experiments showed that endogenous MTMR4 interacts with phosphorylated R-Smads, and that this interaction is correlated with dephosphorylation of R-Smads. Further analysis showed that overexpression of MTMR4 resulted in the sequestration of activated Smad3 in the early endosomes, thus reducing its nuclear translocation. However, both point mutations at the conserved catalytic site of the phosphatase (MTMR4-C407S) and small interference RNA of endogenous Mtmr4 expression led to sustained Smad3 activation. This work therefore suggests that MTMR4 plays an important role in preventing the overactivation of TGFbeta signaling by dephosphorylating activated R-Smads that have been trafficked to early endosomes.