TGF-β is a immunoregulatory cytokine that inhibits class II MHC expression in a variety of cell types. Previous studies have shown that the class II MHC transactivator (CIITA), a master regulator that controls class II MHC expression, is targeted by TGF-β for repression of IFN-γ-induced class II MHC expression in astrocytes. The mechanism(s) underlying the TGF-β inhibitory effect is not understood. In this study, we demonstrate that TGF-β inhibition of CIITA expression occurs at the transcriptional level, and that both constitutive and IFN-γ-induced human CIITA type IV promoter activity is inhibited by TGF-β. TGF-β does not affect the signaling events that mediate IFN-γ activation of CIITA expression; i.e, TGF-β does not inhibit IFN-γ-induced STAT-1α phosphorylation and/or DNA binding ability, nor is IFN-γ induction of IFN regulatory factor affected. The inhibitory effect of TGF-β on the type IV CIITA promoter is mediated through a promoter region within 80 bp from the transcription start site. Elimination of TGF-β inhibition of class II MHC and CIITA expression in Smad3-deficient astrocytes, as well as restoration of the inhibitory effect by overexpression of the Smad3 protein, demonstrates that Smad3 is essential in mediating TGF-β inhibition of CIITA and class II MHC expression.