Disruption of components in the transforming growth factor-beta (TGF-beta) signalling cascade is a common occurrence in human cancers. TGF-beta pathway activation is accomplished via serine/threonine kinase receptors and intracellular Smad transcription factors. A key regulatory step involves specific ubiquitination by Smurfs that mediate the proteasomal degradation of Smads and/or receptors. Here, we report a novel interaction between Smads and ubiquitin C-terminal hydrolase UCH37, a deubiquitinating enzyme that could potentially reverse Smurf-mediated ubiquitination. In GST pull down experiments, UCH37 bound weakly to Smad2 and Smad3, and bound very strongly to Smad7 in a region that is distinct from the -PY- motif in Smad7 that interacts with Smurf ubiquitin ligases. Endogenous Smad7 and UCH37 formed a stable complex in U4A/JAK1 cells, and FLAG-Smad7 co-immunoprecipitated with HA-UCH37 in transfected HEK-293 cells. In addition, we show that UCH37 can deubiquitinate and stabilize the type I TGF-beta receptor. Furthermore, overexpression of UCH37 upregulates TGF-beta-dependent transcription, and this effect is reversed in cells subject to RNAi-mediated knockdown of endogenous UCH37. These findings support a new role for deubiquitinating enzymes in the control of the TGF-beta signalling pathway, and provide a novel molecular target for the design of inhibitors with therapeutic potential in cancer.