In response to environmental signals, Caenorhabditis elegans has two distinct life-cycles—reproductive, in which the animals rapidly grow to the adult reproductive stage, and dauer, in which the animals arrest development at the anatomically and metabolically distinctive third-larval dauer stage (Riddle and Albert 1997). Environmental conditions are sensed in chemosensory neurons (Bargmann and Horvitz 1991), which couple to a transforming growth factor β (TGF-β) signaling pathway (Georgi et al. 1990; Estevez et al. 1993; Ren et al. 1996) as well as an insulin-related signaling pathway (Morris et al. 1996; Kimura et al. 1997) to trigger changes in the development of the many tissues remodeled in dauer larvae (Riddle and Albert 1997). Mutations in daf-7 [a TGF-β homolog (Ren et al. 1996)], daf-4 [a type II TGF-β receptor (Estevez et al. 1993)], daf-1 [a type I TGF-β receptor (Georgi et al. 1990)], daf-8, and daf-14 [Smad (for small and mad) homologs (A. Estevez and D.L. Riddle, pers. comm.; T. Inoue and J. Thomas, pers. comm.)] cause constitutive arrest at the dauer stage even in conditions that promote reproductive growth. These genes constitute a neuronal signaling pathway that is active during reproductive development. The DAF-7 TGF-β signal is produced by the sensory neuron ASI during reproductive development, whereas daf-7 expression in this neuron is inhibited during dauer-inducing conditions (Ren et al. 1996; Schackwitz et al. 1996). DAF-7 binding to the DAF-1/DAF-4 receptors has been suggested to activate the DAF-8/DAF-14 Smads to promote a commitment to reproductive growth (Ren et al. 1996; A. Estevez and D.L. Riddle, pers. comm.; T. Inoue and J. Thomas, pers. comm.). A model for signaling by TGF-β and related receptors has emerged recently. Binding of ligand induces dimerization of receptors to produce an active signaling kinase (Attisano et al. 1994; Miyazano et al. 1994). This complex phosphorylates cytoplasmic Smad proteins and causes them to relocate to the nucleus, where they act as transcription factors (Chen et al. 1996; Liu et al. 1996; Mascias-Silva et al. 1996; Chen et al. 1997; Kim et al. 1997; Kretzschmar et al. 1997). The Smad protein phosphorylated is determined by the identity of the complex, for example, BMP receptors phosphorylate Smad1 (Kretzschmar et al. 1997), whereas TGF-β and activin receptors target Smad2 or Smad3 (Chen et al. 1996; Chen et al. 1996; Lagna et al. 1996; Mascias-Silva et al. 1996; Zhang et al. 1996, 1997). All of the above Smads interact with DPC4, a member of a second class of Smad proteins, and all three pathways are potentiated by DPC4 (Lagna et al. 1996; Mascias-Silva et al. 1996; Zhang et al. 1996, 1997; Kretzschmar et al. 1997); therefore, DPC4 is thought to be a general cofactor for pathway-specific Smads such as Smad1, Smad2, and Smad3. The small TGF-β-related pathway in C. elegans also requires both a DPC4-like Smad (sma-4) and two other Smads more closely related to Smad-1 (sma-2 and sma-3) (Savage et al. 1996). Drosophila melanogaster also has Mad, which resembles Smad1, and a DPC4 homolog as well (P. Das and R. Padgett, pers. comm.). The requirement for these two basic types of Smads may be conserved in TGF-β related-pathways across metazoan phylogeny. Because Smad proteins are positive transducers of signals, the biological effect of overexpressing Smads is the same as overexpressing or activating receptors (Baker and Harland 1996; Graff et al. 1996), and the effect of Smad mutations mimics the effect of loss-of-function mutations in the receptors (Raftery et al. 1995; Sekelsky et al. 1995; Savage et al. 1996). And, although screens for enhancers of TGF-β pathway mutations have been successful (Raftery et al. 1995), suppressors of TGF-β pathway mutants have not been identified, except in the C. elegans dauer pathway (Riddle et al. 1981; Thomas et al. 1993). daf-3 is a unique TGF-β pathway gene in that it is antagonized, rather than activated by the daf-7 TGF-β-related pathway. The dauer-constitutive phenotypes of mutations in the DAF-7 signal transduction pathway genes (including putative null mutations, see below) are suppressed fully by mutations in daf-3 (Riddle et al. 1981; Vowels and Thomas 1992). These genetic data indicate that in the absence of DAF-7 signaling, the lack of antagonism releases DAF-3 activity to induce dauer arrest. In this report, we show that daf-3 encodes a novel Smad, which is antagonized rather than activated by a TGF-β-related pathway. We show that DAF-3 and the TGF-β receptor DAF-4 are expressed widely in tissues that remodel during dauer development, and therefore, may transduce DAF-7 neuroendocrine signals throughout the body to regulate tissue metabolism and development. We show that a DAF-3/GFP fusion protein is nuclear localized and perturbs dauer arrest when mutations are directed to a conserved domain in the carboxy-terminal region, and that DAF-3/GFP fusion proteins are associated with mitotic chromosomes, indicating that DAF-3 functions in the nucleus. The DAF-3 expression level and subcellular localization is independent of upstream DAF-7 signal transduction activity, indicating that the regulation of DAF-3 by DAF-7 signaling may occur downstream of nuclear localization. We propose a model for regulation of DAF-3 activity by the DAF-8/DAF-14 Smads.