Stem cells in normal tissues and cancer-initiating cells (CICs) are known to be enriched in side population (SP) cells. However, the factors responsible for the regulation of expression of ABCG2, involved in efflux of dyes, in SP cells have not been fully investigated. Here, we characterized the SP cells within diffuse-type gastric carcinoma, and examined the effects of transforming growth factor-β (TGF-β) on SP cells. Diffuse-type gastric carcinoma cells established from four independent patients universally contained SP cells between 1 and 4% of total cells, which displayed greater tumorigenicity than non-SP cells did. TGF-β repressed the transcription of ABCG2 through direct binding of Smad2/3 to its promoter/enhancer, and the number of SP cells and the tumor-forming ability of cancer cells were decreased by TGF-β, although ABCG2 is not directly involved in the tumor-forming ability of SP cells. Cancer cells from metastatic site expressed much higher levels of ABCG2 and included a greater percentage of SP cells than parental cancer cells did. SP cells are thus responsible for the progression of diffuse-type gastric carcinoma, and TGF-β negatively contributes to maintain the CICs within the cancer.