Smad4 functions as a transcription factor in TGF-beta signalling. We have investigated the role of Smad4 in the TGF-beta1 cell responses of transformed PDV keratinocytes, which contain a Ras oncogene, and of non-tumorigenic MCA3D keratinocytes, by transfecting both cell lines with a dominant-negative Smad4 construct. Smad4 mediates TGF-beta1-induced up-regulation of p21Cip1 and growth arrest in MCA3D cells. However, in PDV keratinocytes, Smad4 is only partially involved in TGF-beta1-induced growth inhibition, and does not mediate enhancement of p21Cip1 levels by the growth factor. TGF-beta1 activates Ras/Erk signalling activity in both cell lines. PD098059, a specific inhibitor of MEK, disminishes TGF-beta1-induced p21Cip1 levels in PDV but not in MCA3D cells, suggesting an involvement of Erk in up-regulation of p21Cip1 by TGF-beta1 in PDV cells. PDV dominant-negative Smad4 cell transfectants, but not MCA3D transfectants, showed constitutive hyperactivation of the Ras/Erk signalling pathway, increased secretion of urokinase, higher motility properties, and a change to a fibroblastoid cell morphology associated in vivo with the transition from a well differentiated to a poorly differentiated tumour phenotype. Infection of MCA3D control and dominant negative Smad4 cell transfectants with retroviruses carrying a Ras oncogene led to enhanced p21Cip1 and urokinase secreted levels, independently of TGF-beta1 stimulation, that were reduced by PD098059. These results suggest that Smad4 acts inhibiting Ras-dependent Erk signalling activity in Ras-transformed keratinocytes. Loss of Smad4 function in these cells results in hyperactivation of Erk signalling and progression to undifferentiated carcinomas. Oncogene (2000) 19, 4134 - 4145