Objective: Increasing evidence shows that TGF-beta 1 is a key mediator in diabetic nephropathy (DN) and induces renal fibrosis positively by Smad3 but negatively by Smad7. However, treatment of DN by blocking the TGF-beta/Smad pathway remains limited. The present study investigated the anti-fibrotic effect of a traditional Chinese medicine, Chaihuang-Yishen granule (CHYS), on DN. Research Design and Methods: Protective role of CHYS in DN was examined in an accelerated type 1 DN induced by streptozotocin in uninephrectomized Wistar rats. CHYS, at a dose of 0.56 g/kg body weight, was administered by a daily gastric gavage for 20 weeks and the therapeutic effect and potential mechanisms of CHYS on diabetic kidney injury were examined. Results: Treatment with CHYS attenuated diabetic kidney injury by significantly inhibiting 24-h proteinuria and progressive renal fibrosis including glomerulosclerotic index, tubulointerstitial fibrosis index, and upregulation of extracellular matrix (collagen I, IV, and fibronectin), despite the same levels of blood glucose. Further studies revealed that inhibition of renal fibrosis in CHYS-treated diabetic rats was associated with inhibition of TGF-beta 1/Smad3 signaling as demonstrated by upregulation of Smad7 but downregulation of TGF-beta 1, TGF-beta receptors, activation of Smad3, and expression of miRNA-21. Conclusions: CHYS may be a therapeutic agent for DN. CHYS attenuates DN by blocking TGF-beta/Smad3-mediated renal fibrosis.