In many cancers, inactivating mutations in both alleles of the transforming growth factor beta (TGF-beta) type 11 receptor (TbetaRII) gene occur and correlate with loss of sensitivity to TGF-beta. Here we describe a novel mechanism for loss of sensitivity to growth inhibition by TGF-beta in tumor development. Mac-1 cells, isolated from the blood of a patient with an indolent form of cutaneous T-cell lymphoma, express wild-type TbetaRII and are sensitive to TGF-beta. Mac-2A cells, clonally related to Mac-1 and isolated from a skin nodule of the same patient at a later, clinically aggressive stage of lymphoma, are resistant to TGF-beta. They express both the wild-type TbetaRII and a receptor with a single point mutation (Asp-404-Gly [D404G]) in the kinase domain (D404G-->TbetaRII); no TbetaRI or TbetaRII is found on the plasma membrane, suggesting that D404G-TbetaRII dominantly inhibits the function of the wild-type receptor by inhibiting its appearance on the plasma membrane. Indeed, inducible expression, under control of a tetracycline-regulated promoter, of D404G-TbetaRII in TGF-beta- sensitive Mac-1 cells as well as in Hep3B hepatoma cells results in resistance to TGF-beta and disappearance of cell surface TbetaRI and TbetaRII. Overexpression of wild-type TbetaRII in Mac-2A cells restores cell surface TbetaRI and TbetaRH and sensitivity to TGF-beta. The ability of the D404G-TbetaRH to dominantly inhibit function of wild-type TGF-beta receptors represents a new mechanism for loss of sensitivity to the growth-inhibitory functions of TGF-beta in tumor development.