Transforming growth factor-beta (TGF-beta) has multiple functions including increasing extracellular matrix deposition in fibrosis. It functions through a complex family of cell surface receptors that mediate downstream signaling. We report here that a transmembrane heparan sulfate proteoglycan, syndecan-2 (S2), can regulate TGF-beta signaling. S2 protein increased in the renal interstitium in diabetes and regulated TGF-beta-mediated increased matrix deposition in vitro. Transfection of renal papillary fibroblasts with S2 or a S2 construct that has a truncated cytoplasmic domain (S2DeltaS) promoted TGF-beta binding and S2 core protein ectodomain directly bound TGF-beta. Transfection with S2 increased the amounts of type I and type II TGF-beta receptors (TbetaRI and TbetaRII), whereas S2DeltaS was much less effective. In contrast, S2DeltaS dramatically increased the level of type III TGF-beta receptor (TbetaRIII), betaglycan, whereas S2 resulted in a decrease. Syndecan-2 specifically co-immunoprecipitated with betaglycan but not with TbetaRI or TbetaRII. This is a novel mechanism of control of TGF-beta action that may be important in fibrosis.