The transforming growth factor beta (TGF-beta) superfamily, including the bone morphogenetic protein (BMP) and TGF-beta/activin A subfamilies, is regulated by secreted proteins able to sequester or present ligands to receptors. KCP is a secreted, cysteine-rich (CR) protein with similarity to mouse Chordin and Xenopus laevis Kielin. KCP is an enhancer of BMP signaling in vertebrates and interacts with BMPs and the BMP type I receptor to promote receptor-ligand interactions. Mice homozygous for a KCP null allele are hypersensitive to developing renal interstitial fibrosis, a disease stimulated by TGF-beta but inhibited by BMP7. In this report, the effects of KCP on TGF-beta/activin A signaling are examined. In contrast to the enhancing effect on BMPs, KCP inhibits both activin A- and TGF-beta1-mediated signaling through the Smad2/3 pathway. These inhibitory effects of KCP are mediated in a paracrine manner, suggesting that direct binding of KCP to TGF-beta1 or activin A can block the interactions with prospective receptors. Consistent with this inhibitory effect, primary renal epithelial cells from KCP mutant cells are hypersensitive to TGF-beta and exhibit increased apoptosis, dissociation of cadherin-based cell junctions, and expression of smooth muscle actin. Furthermore, KCP null animals show elevated levels of phosphorylated Smad2 after renal injury. The ability to enhance BMP signaling while suppressing TGF-beta activation indicates a critical role for KCP in modulating the responses between these anti- and profibrotic cytokines in the initiation and progression of renal interstitial fibrosis.