Transforming growth factor-beta (TGF-beta) and retinoic acid (RA) are important regulators of cell growth and differentiation. The TGF-beta receptors utilize Smad proteins to transduce signals intracellularly and regulate transcription of target genes, either directly or in combination with other sequence-specific transcription factors. Two classes of nuclear receptors, the retinoic acid receptors (RARs) and the retinoic X receptors, are involved in mediating transcriptional responses to RA. Given the known interactions between the TGF-beta and RAR pathways, we have investigated the role played by RAR ligands in modulating functional interactions between Smad3 and RARs. Using transient cell transfection experiments with an artificial Smad3/Smad4-dependent reporter construct, we demonstrate that RAR overexpression enhances Smad-driven transactivation, an effect that requires both Smad3 and Smad4. We provide evidence that RAR effect on Smad3/Smad4-driven transcription is prevented by natural and synthetic RAR agonists, and potentiated by synthetic RAR antagonists. The activity of two TGF-beta-responsive human gene promoter constructs was regulated in a parallel fashion. Using both mammalian two-hybrid and immunoprecipitation/Western methods, we demonstrate a direct interaction between the region DEF of RARgamma and the MH2 domain of Smad3, inhibited by RAR agonists and enhanced by their antagonists. We propose that RARs may function as coactivators of the Smad pathway in the absence of RAR agonists or in the presence of their antagonists, a phenomenon that contrasts with their known role as agonist-activated transcriptional regulators of RA-dependent genes.