Transforming growth factor-beta (TGF-beta) is a potent inhibitor of skeletal muscle differentiation, but the molecular mechanism and signaling events that lead to this inhibition are poorly characterized. Here we show that the TGF-beta intracellular effector Smad3, but not Smad2, mediates the inhibition of myogenic differentiation in MyoD-expressing C3H10T1/2 cells and C2C12 myoblasts by repressing the activity of the MyoD family of transcriptional factors. The Smad3-mediated repression was directed at the E-box sequence motif within muscle gene enhancers and the bHLH region of MyoD, the domain required for its association with E-protein partners such as E12 and E47. The repression could be overcome by supplying an excess of E12, and covalent tethering of E47 to MyoD rendered the E-box-dependent transcriptional activity refractory to the effects of Smad3 and TGF-beta. Smad3 physically interacted with the HLH domain of MyoD, and this interaction correlated with the ability of Smad3 to interfere with MyoD/E protein heterodimerization and binding of MyoD complexes to oligomerized E-box sites. Together, these results reveal a model for how TGF-beta, through Smad3-mediated transcriptional repression, inhibits myogenic differentiation.