IFN-gamma and TGF-beta are important regulators of mucosal immunity, typically functioning in opposition to each other. In this study, we assessed whether TGF-beta could modulate IFN-gamma-induced STAT1 signaling. Model epithelial cell lines (HEp-2, HT-29, and T84) or monocytes/macrophages (THP-1 cell line, human blood mononuclear cells) were pretreated with TGF-beta (1 ng/ml; 5-60 min), followed by IFN-gamma exposure (20 ng/ml; 30 min), and then STAT1 transcriptional activity, DNA-binding activity, phosphorylation, and methylation were assessed. Some epithelia were transfected with an expression plasmid encoding SMAD7 to block TGF-beta-SMAD signaling. Epithelia, but not macrophages, pretreated with TGF-beta were hyporesponsive to IFN-gamma stimulation as indicated by reduced expression of four STAT1-regulated genes and reduced STAT1 DNA binding on EMSA. However, STAT1 Tyr(701)-, Ser(727) phosphorylation, and nuclear recruitment of STAT1 were not significantly different in IFN-gamma with or without TGF-beta-treated cells, indicating that the effects of TGF-beta are downstream of IFN-gammaR-JAK-STAT1 interaction. The TGF-beta effect was not dependent on ERK1/2, p38, or JNK activation but was prevented by overexpression of the inhibitory SMAD7 protein. Additional studies suggest that TGF-beta blockade of IFN-gamma activity in epithelia is via enhanced sequestering of STAT1 by pre-existing protein inhibitor of activated STAT1. These results demonstrate that TGF-beta rapidly suppresses IFN-gamma-driven STAT1 signaling by reducing DNA binding via promotion of STAT1-protein inhibitor of activated STAT1 interactions and not inhibition of STAT1 activation; an event that may be specific to epithelia and represent a novel mode of action of TGF-beta.