Determination of signaling pathways that regulate beta-cell replication is critical for beta-cell therapy. Here, we show that blocking pancreatic macrophage infiltration after pancreatic duct ligation (PDL) completely inhibits beta-cell proliferation. The TGFβ superfamily signaling inhibitor SMAD7 was significantly up-regulated in beta cells after PDL. Beta cells failed to proliferate in response to PDL in beta-cell–specific SMAD7 mutant mice. Forced expression of SMAD7 in beta cells by itself was sufficient to promote beta-cell proliferation in vivo. M2, rather than M1 macrophages, seem to be the inducers of SMAD7-mediated beta-cell proliferation. M2 macrophages not only release TGFβ1 to directly induce up-regulation of SMAD7 in beta cells but also release EGF to activate EGF receptor signaling that inhibits TGFβ1-activated SMAD2 nuclear translocation, resulting in TGFβ signaling inhibition. SMAD7 promotes beta-cell proliferation by increasing CyclinD1 and CyclinD2, and by inducing nuclear exclusion of p27. Our study thus reveals a molecular pathway to potentially increase beta-cell mass through enhanced SMAD7 activity induced by extracellular stimuli.