Smad7 is a principal inhibitor of the TGFβ–Smad signalling pathway. We have investigated the functional significance of Smad7 in hepatocellular carcinoma (HCC). Smad7 knockout (KO) and wild-type (WT) mice were injected with diethylnitrosamine (DEN) to induce HCC. The effects of Smad7 on cellular features were examined in HCC cells, using a Smad7 over-expression or deletion approach. Signalling pathway components modulated by Smad7 in HCC were evaluated using luciferase reporter assay and co-immunoprecipitation. Smad7 was down-regulated in human HCCs compared with the adjacent normal tissues (p < 0.001). Smad7 KO mice were more susceptible to DEN-induced HCC than WT mice (78% versus 22%, p < 0.05). HCCs from KO mice displayed a greater proliferation activity (p < 0.05) and a reduced apoptotic index compared with WT littermates (p < 0.05). Deletion of Smad7 promoted cell proliferation in primary cultured HCC cells. In addition, over-expression of Smad7 in HCC cell lines markedly suppressed cell growth (p < 0.0001) and colony formation (p < 0.01). Cell cycle analysis revealed an increase in the G1 phase and a reduction in the S-phase populations, accompanied by up-regulation of p27Kip1 and down-regulation of cyclin D1. Smad7 increased cell apoptosis (p < 0.01) by mediating an intrinsic [caspase-9, caspase-3 and poly(ADP-ribose) polymerase] apoptotic pathway. Moreover, Smad7 inhibited NF-κB signalling by interacting with TAB2, an upstream activator of NF-κB, and inhibited TGFβ signalling by suppressing phosphorylation of Smad3. In conclusion, loss of Smad7 enhances susceptibility to HCC. Smad7 suppresses HCC cell growth by inhibiting proliferation and G1–S phase transition and inducing apoptosis through attenuation of NF-κB and TGFβ signalling. Smad7 acts as a potential tumour suppressor in liver. Copyright © 2013 Pathological Society of Great Britain and Ireland. Published by John Wiley & Sons, Ltd.