Transforming growth factor-beta (TGF-beta) promotes tissue fibrosis via receptor-mediated phosphorylation of the receptor-activated Smad2/3, together with Smad4. Of these, Smad3 plays a major profibrotic role in mouse models of tissue fibrosis. Transcriptional activity of the Smad3 protein is regulated by phosphorylation of residues in the C-terminal domain and the linker region. Herein, we examined the role of a novel phosphorylation site within the MH2 domain (T388) in the regulation of Smad3 activity. Confocal microscopy using an Smad3 phosphorylated T388-specific antibody identified phosphorylation of Smad3 T388 in myofibroblasts and tubular epithelial cells in human focal and segmental glomerulosclerosis and mouse models of unilateral ureteric obstruction and diabetic nephropathy, whereas phosphorylated T388 was largely absent in normal kidney. In vitro, TGF-beta1 induced phosphorylation of Smad3 T388 in a biphasic pattern. A point mutation of T388/V in an Smad3 construct demonstrated that phosphorylation of T388 promotes Smad3 binding to Smad4 and CDK8, but was not necessary for nuclear translocation. Furthermore, T388 phosphorylation was required for TGF-beta-induced collagen I gene promoter activity and extracellular matrix production in cultured fibroblasts. In conclusion, our study identifies phosphorylation of T388 in the Smad3 MH2 domain as an important mechanism that regulates the profibrotic TGF-beta/Smad3 signaling pathway, which has direct relevance to human and experimental fibrotic kidney disease.