Smad proteins play a key role in the intracellular signalling of transforming growth factor β (TGFβ), which elicits a large variety of cellular responses. Upon TGFβ receptor activation, Smad2 and Smad3 become phosphorylated and form heteromeric complexes with Smad4. These complexes translocate to the nucleus where they control expression of target genes. However, the mechanism by which Smads mediate transcriptional regulation is largely unknown. Human plasminogen activator inhibitor-1 (PAI-1) is a gene that is potently induced by TGFβ. Here we report the identification of Smad3/Smad4 binding sequences, termed CAGA boxes, within the promoter of the human PAI-1 gene. The CAGA boxes confer TGFβ and activin, but not bone morphogenetic protein (BMP) stimulation to a heterologous promoter reporter construct. Importantly, mutation of the three CAGA boxes present in the PAI-1 promoter was found to abolish TGFβ responsiveness. Thus, CAGA elements are essential and sufficient for the induction by TGFβ. In addition, TGFβ induces the binding of a Smad3/Smad4-containing nuclear complex to CAGA boxes. Furthermore, bacterially expressed Smad3 and Smad4 proteins, but not Smad1 nor Smad2 protein, bind directly to this sequence in vitro. The presence of this box in TGFβ-responsive regions of several other genes suggests that this may be a widely used motif in TGFβ-regulated transcription.