Members of the transforming growth factor-beta (TGF-beta) superfamily mediate a broad range of biological activities by regulating the expression of target genes. Smad proteins play a critical role in this process by binding directly to the promoter elements and/or associating with other transcription factors. TGF-beta1 up-regulates several genes transcriptionally through Sp1 binding sites; however, the mechanism of TGF-beta induction of gene expression through Sp1 sites is largely unknown. Here we report the identification of a novel 38-base pair TGF-beta-responsive element in the human plasminogen activator inhibitor-1 (PAI-1) promoter, which contains two Sp1 binding sites, and is required for TGF-beta-induced Smad-dependent transcriptional activation. Three canonical Sp1 binding sites also support strong transcriptional activation by TGF-beta and Smads from a minimal heterologous promoter. TGF-beta induction of PAI-1 and p21 is blocked by the Sp1 inhibitor mithramycin, implicating Sp1 in the in vivo regulation of these genes by TGF-beta. We show that the association between endogenous Sp1 and Smad3 is induced by TGF-beta in several cell lines; however, Smad4 shows constitutive interaction with Sp1. These data provide novel insights into the mechanism by which TGF-beta up-regulates several gene expression by activating Sp1-dependent transcription through the induction of Smad/Sp1 complex formation.