Transforming growth factor-beta (TGFbeta) drives fibrosis in diseases such as diabetic nephropathy (DN). Connective tissue growth factor (CTGF; CCN2) has also been implicated in this, but the molecular mechanism is unknown. We show that CTGF enhances the TGFbeta/Smad signaling pathway by transcriptional suppression of Smad 7 following rapid and sustained induction of the transcription factor TIEG-1. Smad 7 is a known antagonist of TGFbeta signaling and TIEG-1 is a known repressor of Smad 7 transcription. CTGF enhanced TGFbeta-induced phosphorylation and nuclear translocation of Smad 2 and Smad 3 in mesangial cells. Antisense oligonucleotides directed against TIEG-1 prevented CTGF-induced downregulation of Smad 7. CTGF enhanced TGFbeta-stimulated transcription of the SBE4-Luc reporter gene and this was markedly reduced by TIEG-1 antisense oligonucleotides. Expression of the TGFbeta-responsive genes PAI-1 and Col III over 48 h was maximally stimulated by TGFbeta+CTGF compared to TGFbeta alone, while CTGF alone had no significant effect. TGFbeta-stimulated expression of these genes was markedly reduced by both CTGF and TIEG-1 antisense oligonucleotides, consistent with the endogenous induction of CTGF by TGFbeta. We propose that under pathological conditions, where CTGF expression is elevated, CTGF blocks the negative feedback loop provided by Smad 7, allowing continued activation of the TGFbeta signaling pathway.