Smad1 has previously been shown to play a key role in the development of diabetic nephropathy (DN), by increasing synthesis of extracellular matrix. However, the regulatory mechanism of Smad1 in DN is still unclear. This study aims to elucidate molecular interactions between activin receptor-like kinase 1 (ALK1)/Smad1 signaling pathway and transcription factor 7-like 2 (TCF7L2) in the progression of DN in vitro and in vivo. The expressions of TCF7L2 and ALK1 were induced by advanced glycation end products (AGEs) in parallel with Smad1, phosphorylated Smad1 (pSmad1), and alpha-smooth muscle actin (α-SMA) through TGF-β1 in cultured mesangial cells. Constitutively active ALK1 increased pSmad1 and α-SMA expressions. The binding of TCF7L2 to ALK1 promoter was confirmed by chromatin immunoprecipitation assay. Furthermore, TCF7L2 induced promoter activity of ALK1. AGEs and TGF-β1 induced a marked increase in TCF7L2 expression in parallel with ALK1. Overexpression of TCF7L2 increased the expressions of ALK1 and Smad1. Inversely, TCF7L2 knockdown by siRNA suppressed α-SMA expression as well as ALK1 and Smad1. The iNOS transgenic mice (iNOS-Tgm), which developed diabetic glomerulosclerosis resembling human diabetic nephropathy, exhibited markedly increased expressions of ALK1, TCF7L2, Smad1, pSmad1, and α-SMA in glomeruli in association with mesangial matrix expansion. These results provide a new evidence that the TCF7L2/ALK1/Smad1 pathway plays a key role in the development of DN.