Bone morphogenetic protein-7 (BMP-7) improves outcome in animal models of fibrotic renal disease by opposing transforming growth factor beta1 (TGF-beta)-dependent fibrosis. However, the underlying mechanisms remain obscure. Here, we studied the effect of BMP-7 on response to TGF-beta in the proximal tubular cell line HK-2 (PTC). BMP-7 specifically limited Smad3 but not Smad2 signaling. BMP-7 did not inhibit Smad3 phosphorylation or nuclear accumulation, nor did BMP-7 alter phosphorylated Smad3 dephosphorylation or degradation. However, BMP-7 treatment reduced Smad3 DNA binding to a consensus Smad binding element probe, and chromatin immunoprecipitation showed reduced Smad3 binding to the plasminogen activator inhibitor-1 promoter in PTCs treated with BMP-7 and TGF-beta compared with TGF-beta alone. Degradation of the transcriptional repressor SnoN has recently been shown to be necessary for Smad3 (but not Smad2) signaling. SnoN expression was transiently lost in PTCs after TGF-beta stimulation, but BMP-7 prevented this. Furthermore, BMP-7 had no effect on Smad3 signaling after siRNA-mediated SnoN knockdown, whereas prevention of SnoN degradation with the proteasome inhibitor MG132 reproduced the inhibitory action of BMP-7 on Smad3 signaling. We conclude that BMP-7 prevents TGF-beta-mediated loss of the transcriptional repressor SnoN and hence specifically limits Smad3 DNA binding, altering the balance of transcriptional responses to TGF-beta in PTCs. These results provide an important mechanistic insight into a key regulator of TGF-beta signaling.