Protein prenylation involves the attachment of a hydrophobic isoprenoid moiety to the C-terminus of proteins. Several small GTPases, including members of the Ras and Rho subfamilies, require prenylation for their normal and pathological functions. Recent work has suggested that SmgGDS proteins regulate the prenylation of small GTPases in vivo. Using RhoA as a representative small GTPase, we directly test this hypothesis using biochemical assays and present a mechanism describing the mode of prenylation regulation. SmgGDS-607 completely inhibits RhoA prenylation catalyzed by protein geranylgeranyltransferase I (GGTase-I) in an in vitro radiolabel incorporation assay. SmgGDS-607 inhibits prenylation by binding to and blocking access to the C-terminal tail of the small GTPase (substrate sequestration mechanism) rather than via inhibition of the prenyltransferase activity. The reactivity of GGTase-I with RhoA is unaffected by addition of nucleotides. In contrast, the affinity of SmgGDS-607 for RhoA varies with the nucleotide bound to RhoA; SmgGDS-607 has a higher affinity for RhoA-GDP compared to RhoA-GTP. Consequently, the prenylation blocking function of SmgGDS-607 is regulated by the bound nucleotide. This work provides mechanistic insight into a novel pathway for the regulation of small GTPase protein prenylation by SmgGDS-607 and demonstrates that peptides are a good mimic for full-length proteins when measuring GGTase-I activity.