Phosphorylation of the SSXS motif of Smads is critical in activating the transforming growth factor β (TGF-β) and bone morphogenetic protein (BMP) pathways. However, the phosphatase(s) involved in dephosphorylating and hence inactivating Smads remained elusive. Through RNA interference (RNAi)-based screening of serine/threonine phosphatases in Drosophila S2 cells, we identified pyruvate dehydrogenase phosphatase (PDP) to be required for dephosphorylation of Mothers against Decapentaplegic (MAD), a Drosophila Smad. Biochemical and genetic evidence suggest that PDP directly dephosphorylates MAD and inhibits signal transduction of Decapentaplegic (DPP). We show that the mammalian PDPs are important in dephosphorylation of BMP-activated Smad1 but not TGF-β-activated Smad2 or Smad3. Thus, PDPs specifically inactivate Smads in the BMP/DPP pathway.