Autoreactive CD4⁺ T lymphocytes play a vital role in the pathogenesis of multiple sclerosis and its animal model, experimental autoimmune encephalomyelitis. Since the discovery of T helper 17 cells, there is an ongoing debate whether T helper 1, T helper 17 or both subtypes of T lymphocytes are important for the initiation of autoimmune neuroinflammation. We examined peripheral blood CD4⁺ cells from patients with active and stable relapsing–remitting multiple sclerosis, and used mice with conditional deletion or over-expression of the transforming growth factor-β inhibitor Smad7, to delineate the role of Smad7 in T cell differentiation and autoimmune neuroinflammation. We found that Smad7 is up-regulated in peripheral CD4⁺ cells from patients with multiple sclerosis during relapse but not remission, and that expression of Smad7 strongly correlates with T-bet, a transcription factor defining T helper 1 responses. Concordantly, mice with transgenic over-expression of Smad7 in T cells developed an enhanced disease course during experimental autoimmune encephalomyelitis, accompanied by elevated infiltration of inflammatory cells and T helper 1 responses in the central nervous system. On the contrary, mice with a T cell-specific deletion of Smad7 had reduced disease and central nervous system inflammation. Lack of Smad7 in T cells blunted T cell proliferation and T helper 1 responses in the periphery but left T helper 17 responses unaltered. Furthermore, frequencies of regulatory T cells were increased in the central nervous system of mice with a T cell-specific deletion and reduced in mice with a T cell-specific over-expression of Smad7. Downstream effects of transforming growth factor-β on in vitro differentiation of naïve T cells to T helper 1, T helper 17 and regulatory T cell phenotypes were enhanced in T cells lacking Smad7. Finally, Smad7 was induced during T helper 1 differentiation and inhibited during T helper 17 differentiation. Taken together, the level of Smad7 in T cells determines T helper 1 polarization and regulates inflammatory cellular responses. Since a Smad7 deletion in T cells leads to immunosuppression, Smad7 may be a potential new therapeutic target in multiple sclerosis.