Homologs of Drosophila Mad function as downstream mediators of the receptors for transforming growth factor beta (TGF-beta)-related factors. Two homologs, the receptor-associated Smad3 and the tumor suppressor Smad4/DPC4, synergize to induce ligand-independent TGF-beta activities and are essential mediators of the natural TGF-beta response. We now show that Smad3 and Smad4 associate in homomeric and heteromeric interactions, as assessed by yeast two-hybrid and coimmunoprecipitation analyses. Heteromeric interactions are mediated through the conserved C-terminal domains of Smad3 and Smad4. In Smad3, the homomeric interaction is mediated by the same domain. In contrast, the homomeric association of Smad4 requires both the N-terminal domain and the C-terminal domain, which by itself does not homomerize. Mutations that have been associated with impaired Mad activity in Drosophila or decreased tumor suppressor activity of Smad4/DPC4 in pancreas cancer, including a short C-terminal truncation and two point mutations in the conserved C-terminal domains, impair the ability of Smad3 and Smad4 to undergo homo- and heteromeric associations. Analyses of the biological activity of Smad3 and Smad4 and their mutants show that full signaling activity correlates with their ability to undergo efficient homo- and heteromeric interactions. Mutations that interfere with these interactions result in decreased signaling activity. Finally, we evaluated the ability of Smad3 or Smad4 to induce transcriptional activation in yeast. These results correlate the ability of individual Smads to homomerize with transcriptional activation and additionally with their biological activity in mammalian cells.