Myofibroblasts are a main cell-type of collagen-producing cells during tissue fibrosis, but their origins remains controversial. While bone marrow-derived myofibroblasts in renal fibrosis has been reported, the cell origin and mechanisms regulating their transition into myofibroblasts remain undefined. In the present study, cell lineage tracing studies by adoptive transfer of GFP+ or dye-labelled macrophages identified that monocyte/macrophages from bone marrow can give rise to myofibroblasts via the process of macrophage-myofibroblast transition (MMT) in a mouse model of unilateral ureteric obstruction. The MMT cells were a major source of collagen-producing fibroblasts in the fibrosing kidney, accounting for more than 60% of α-SMA+ myofibroblasts. The MMT process occurred predominantly within M2-type macrophages and was regulated by TGF-β/Smad3 signalling as deletion of Smad3 in the bone marrow compartment of GFP+ chimeric mice prevented the M2 macrophage transition into the MMT cells and progressive renal fibrosis. In vitro studies in Smad3 null bone marrow macrophages also showed that Smad3 was required for TGF-β1-induced MMT and collagen production. In conclusion, we have demonstrated that bone marrow-derived fibroblasts originate from the monocyte/macrophage population via a process of MMT. This process contributes to progressive renal tissue fibrosis and is regulated by TGF-β/Smad3 signalling.