Objective. To investigate the biologic significance of Smad3 in the progression of osteoarthritis (OA), the crosstalk between Smad3 and activating transcription factor 2 (ATF-2) in the transforming growth factor β (TGFβ) signaling pathway, and the effects of ATF-2 overexpression and p38 activation in chondrocyte differentiation. Methods. Joint disease in Smad3-knockout (Smad3-/-) mice was examined by microfocal computed tomography and histologic analysis. Numerous in vitro methods including immunostaining, real-time polymerase chain reaction, Western blotting, an ATF-2 DNA-binding assay, and a p38 kinase activity assay were used to study the various signaling responses and protein interactions underlying the altered chondrocyte phenotype in Smad3-/- mice. Results. In Smad3 -/- mice, an end-stage OA phenotype gradually developed. TGFβ-activated kinase 1 (TAK1)/ATF-2 signaling was disrupted in Smad3 -/- mouse chondrocytes at the level of p38 MAP kinase (MAPK) activation, resulting in reduced ATF-2 phosphorylation and transcriptional activity. Reintroduction of Smad3 into Smad3-/- cells restored the normal p38 response to TGFβ. Phosphorylated p38 formed a complex with Smad3 by binding to a portion of Smad3 containing both the MAD homology 1 and linker domains. Additionally, Smad3 inhibited the dephosphorylation of p38 by MAPK phosphatase 1 (MKP-1). Both ATF-2 overexpression and p38 activation repressed type X collagen expression in wild-type and Smad3-/- chondrocytes. P38 was detected in articular cartilage and perichondrium; articular and sternal chondrocytes expressed p38 isoforms α, β, and γ, but not δ. Conclusion. Smad3 is involved in both the onset and progression of OA. Loss of Smad3 abrogates TAK1/ ATF-2 signaling, most likely by disrupting the Smad3-phosphorylated p38 complex, thereby promoting p38 dephosphorylation and inactivation by MKP-1. ATF-2 and p38 activation inhibit chondrocyte hypertrophy. Modulation of p38 isoform activity may provide a new therapeutic approach for OA.