Transforming growth factor β (TGF-β) is cytostatic towards damage-induced compensatory hepatocyte proliferation. This function is frequently lost during hepatocarcinogenesis, thereby switching the TGF-β role from tumour suppressor to tumour promoter. In the present study, we investigate Smad7 overexpression as a pathophysiological mechanism for cytostatic TGF-β inhibition in liver damage and hepatocellular carcinoma (HCC). Transgenic hepatocyte-specific Smad7 overexpression in damaged liver of fumarylacetoacetate hydrolase (FAH)-deficient mice increased compensatory proliferation of hepatocytes. Similarly, modulation of Smad7 expression changed the sensitivity of Huh7, FLC-4, HLE and HLF HCC cell lines for cytostatic TGF-β effects. In our cohort of 140 HCC patients, Smad7 transcripts were elevated in 41.4% of HCC samples as compared with adjacent tissue, with significant positive correlation to tumour size, whereas low Smad7 expression levels were significantly associated with worse clinical outcome. Univariate and multivariate analyses indicate Smad7 levels as an independent predictor for overall (P<0.001) and disease-free survival (P=0.0123). Delineating a mechanism for Smad7 transcriptional regulation in HCC, we identified cold-shock Y-box protein-1 (YB-1), a multifunctional transcription factor. YB-1 RNAi reduced TGF-β-induced and endogenous Smad7 expression in Huh7 and FLC-4 cells respectively. YB-1 and Smad7 mRNA expression levels correlated positively (P<0.0001). Furthermore, nuclear co-localization of Smad7 and YB-1 proteins was present in cancer cells of those patients. In summary, the present study provides a YB-1/Smad7-mediated mechanism that interferes with anti-proliferative/tumour-suppressive TGF-β actions in a subgroup of HCC cells that may facilitate aspects of tumour progression.