Macrophages are essential regulators in tissue injury, repair and fibrosis. Although activation of TGF-β signaling cascades critically modulates macrophage phenotype in vitro, the in vivo role of macrophage TGF-β signaling in homeostasis and disease is unknown. Our study examined the role of macrophage-specific TGF-β/Smad3 signaling in a mouse model of myocardial infarction (MI). TGF-βs markedly activated Smad3 in isolated macrophages, without affecting Smad-independent pathways. Infarct macrophages, but not neutrophils exhibited Smad3 activation. Phagocytosis rapidly and directly activated macrophage Smad3, in the absence of active TGF-β1 release. Myeloid cell-specific Smad3 knockout mice (MyS3KO) had no baseline defects, but exhibited increased late mortality and accentuated remodeling following MI. Adverse outcome in MyS3KO mice after MI was associated with perturbations in phagocytic activity, with defective transition of macrophages to an anti-inflammatory phenotype and with scar expansion. Milk-fat globule EGF factor-8 (Mfge8) partly rescued the phagocytic defect of Smad3 null macrophages, without affecting inflammatory activity. Perturbed anti-inflammatory transition of Smad3 null macrophages was associated with marked attenuation of phagocytosis-mediated PPAR induction. We demonstrate that Smad3 is activated in phagocytic macrophages, critically regulates their function and mediates anti-inflammatory transition, and protects the infarcted heart from adverse remodeling.