Members of the TGF-beta superfamily influence a broad range of biological activities including stimulation of wound healing and inhibition of cell growth. TGF-beta signals through type I and II receptor serine/ threonine kinases and induces transcription of many genes including plasminogen activator inhibitor-1 (PAI-1). To identify proteins that participate in TGF-beta-induced gene expression, we developed a novel retrovirus-mediated expression cloning strategy; and using this approach, we established that transcription factor microE3 (TFE3) is involved in TGF-beta-induced activation of the PAI-1 promoter. We showed that TFE3 binds to an E-box sequence in PE2, a 56-bp promoter fragment of the PAI-1 promoter, and that mutation of this sequence abolishes both TFE3 binding as well as TGF-beta-dependent activation. TFE3 and Smad3 synergistically activate the PE2 promoter and phosphorylated Smad3 and Smad4 bind to a sequence adjacent to the TFE3-binding site in this promoter. Binding of both TFE3 and the Smad proteins to their cognate sequences is indispensable for TGF-beta-inducible activation of the PE2 promoter. Hence, TFE3 is an important transcription factor in at least one TGF-beta-activated signal transduction pathway.