SMAD6 is a crucial feedback inhibitory regulator of bone morphogenetic protein (BMP)/SMAD signalling. Although little is known regarding the post-transcriptional modification of inhibitory SMADs and the mechanism by which their function is regulated. In this study, using a whole proteomic interaction screen for SMAD6, we identified a large putative E2 ubiquitin-conjugating enzyme UBE2O (E2-230K) as a novel interacting protein of SMAD6. We showed that UBE2O functions as an E2-E3 hybrid to monoubiquitinate SMAD6 at lysine 174 and that the cysteine 885 residue of human UBE2O is necessary for SMAD6 monoubiquitination. Inactivation of the SMAD6 monoubiquitination site specially potentiates the inhibitory ability of SMAD6 against BMP7-induced SMAD1 phosphorylation and transcriptional responses. We also found that UBE2O potentiated BMP7 signalling in a SMAD6-dependent manner. Addressing the molecular mechanism by which UBE2O and monoubiquitinated SMAD6 potentiate BMP7 signalling, we demonstrated that monoubiquitinated SMAD6 impairs the binding affinity of non-modified SMAD6 to the BMP type I receptor. Moreover, UBE2O and SMAD6 cooperated in the regulation of BMP7-induced adipogenesis.