Transforming growth factor-β (TGF-β) ligands activate Smad-mediated and noncanonical signaling pathways in a cell context-dependent manner. Localization of signaling receptors to distinct membrane domains is a potential source of signaling output diversity. The tumor suppressor/endocytic adaptor protein disabled-2 (Dab2) was proposed as a modulator of TGF-β signaling. However, the molecular mechanism(s) involved in the regulation of TGF-β signaling by Dab2 were not known. Here we investigate these issues by combining biophysical studies of the lateral mobility and endocytosis of the type I TGF-β receptor (TβRI) with TGF-β phosphoprotein signaling assays. Our findings demonstrate that Dab2 interacts with TβRI to restrict its lateral diffusion at the plasma membrane and enhance its clathrin-mediated endocytosis. Small interfering RNA-mediated knockdown of Dab2 or Dab2 overexpression shows that Dab2 negatively regulates TGF-β-induced c-Jun N-terminal kinase (JNK) activation, whereas activation of the Smad pathway is unaffected. Moreover, activation of JNK by TGF-β in the absence of Dab2 is disrupted by cholesterol depletion. These data support a model in which Dab2 regulates the domain localization of TβRI in the membrane, balancing TGF-β signaling via the Smad and JNK pathways.