Smad7 is a principal inhibitor of the TGFβ-Smad signalling pathway. We have investigated the functional significance of Smad7 in hepatocellular carcinoma (HCC). Smad7 knockout (KO) and wild-type (WT) mice were injected with diethylnitrosamine (DEN) to induce HCC. The effects of Smad7 on cellular features were examined in HCC cells, using a Smad7 over-expression or deletion approach. Signalling pathway components modulated by Smad7 in HCC were evaluated using luciferase reporter assay and co-immunoprecipitation. Smad7 was down-regulated in human HCCs compared with the adjacent normal tissues (p < 0.001). Smad7 KO mice were more susceptible to DEN-induced HCC than WT mice (78% versus 22%, p < 0.05). HCCs from KO mice displayed a greater proliferation activity (p < 0.05) and a reduced apoptotic index compared with WT littermates (p < 0.05). Deletion of Smad7 promoted cell proliferation in primary cultured HCC cells. In addition, over-expression of Smad7 in HCC cell lines markedly suppressed cell growth (p < 0.0001) and colony formation (p < 0.01). Cell cycle analysis revealed an increase in the G1 phase and a reduction in the S-phase populations, accompanied by up-regulation of p27(Kip1) and down-regulation of cyclin D1. Smad7 increased cell apoptosis (p < 0.01) by mediating an intrinsic [caspase-9, caspase-3 and poly(ADP-ribose) polymerase] apoptotic pathway. Moreover, Smad7 inhibited NF-κB signalling by interacting with TAB2, an upstream activator of NF-κB, and inhibited TGFβ signalling by suppressing phosphorylation of Smad3. In conclusion, loss of Smad7 enhances susceptibility to HCC. Smad7 suppresses HCC cell growth by inhibiting proliferation and G1 -S phase transition and inducing apoptosis through attenuation of NF-κB and TGFβ signalling. Smad7 acts as a potential tumour suppressor in liver.