The transforming growth factor beta (TGF beta) related signaling is one of the most important signaling pathways regulating early developmental events. Smad2 and Smad3 are structurally similar and it is mostly considered that they are equally important in mediating TGF beta signals. Here, we show that Smad3 is an insensitive TGF beta transducer as compared with Smad2. Smad3 preferentially localizes within the nucleus and is thus sequestered from membrane signaling. The ability of Smad3 in oligomerization with Smad4 upon agonist stimulation is also impaired given its unique linker region. Smad2 mediated TGF beta signaling plays a crucial role in epiblast development and patterning of three germ layers. However, signaling unrelated nuclear localized Smad3 is dispensable for TGF beta signaling-mediated epiblast specification, but important for early neural development, an event blocked by TGF beta/Smad2 signaling. Both Smad2 and Smad3 bind to the conserved Smads binding element (SBE), but they show nonoverlapped target gene binding specificity and differential transcriptional activity. We conclude that Smad2 and Smad3 possess differential sensitivities in relaying TGF beta signaling and have distinct roles in regulating early developmental events.