Development and repair of the skeletal system and other organs is highly dependent on precise regulation of bone morphogenetic proteins (BMPs), their receptors, and their intracellular signaling proteins known as Smads. The use of BMPs clinically to induce bone formation has been limited in part by the requirement of much higher doses of recombinant proteins in primates than were needed in cell culture or rodents. Therefore, control of cellular responsiveness to BMPs is now a critical area that is poorly understood. We determined that LMP-1, a LIM domain protein capable of inducing de novo bone formation, interacts with Smurf1 (Smad ubiquitin regulatory factor 1) and prevents ubiquitination of Smads. In the region of LMP responsible for bone formation, there is a motif that directly interacts with the Smurf1 WW2 domain and can effectively compete with Smad1 and Smad5 for binding. We have shown that small peptides containing this motif can mimic the ability to block Smurf1 from binding Smads. This novel interaction of LMP-1 with the WW2 domain of Smurf1 to block Smad binding results in increased cellular responsiveness to exogenous BMP and demonstrates a novel regulatory mechanism for the BMP signaling pathway.