Diabetic nephropathy (DN) is the major cause of end-stage renal disease in diabetic patients. Zicao, a well-known Chinese traditional medicine, has attracted much attention due to its beneficial effects in various medical fields. In this study, we attempted to investigate the effects and mechanisms of action of acetylshikonin, the main ingredient of Zicao, on renal dysfunction in DN. Our results showed that administration with acetylshikonin not only decreased blood urea nitrogen, urine creatinine and the mean kidney-to-body weight ratio in streptozotocin-induced diabetic mice, but also restored the loss of body weight, whereas the blood glucose was not changed. Masson's trichrome staining showed that acetylshikonin treatment resulted in a marked decrease in kidney fibrosis from diabetic mice. The increased expression of fibrosis proteins, such as plasminogen activator inhibitor type 1 (PAI-1), connective tissue growth factor, and collagen III and IV, were reduced after acetylshikonin administration. In addition, the expressions of interleukin-1β, interleukin-6, monocyte chemoattractant protein-1, intercellular adhesion molecule 1 and infiltration of macrophages in kidney tissues were decreased in acetylshikonin-treated diabetic mice. Acetylshikonin led to a reduction of transforming growth factor-β1 (TGF-β1) expression and Smad-2/3 phosphorylation, as accompanied by increased Smad7 expression. Furthermore, in vitro treatment with acetylshikonin markedly attenuated TGF-β1-induced the PAI-1, collagen III and IV, and Smad-2/3 phosphorylation in HK2 immortalized human proximal tubule epithelial cells. Acetylshikonin also prevented epithelial-to-mesenchymal transition induced by TGF-β1. Collectively, our study provides evidences that acetylshikonin attenuates renal fibrosis though inhibiting TGF-β1/Smad signaling pathway, suggesting that acetylshikonin may be a novel therapeutic agent for the treatment of DN.