Natural killer (NK) cells are key components of the innate immune system, providing potent antitumor immunity. Here, we show that the tumor growth factor-β (TGF-β)/SMAD signaling pathway is an important mechanism for NK cell immune evasion in childhood B-acute lymphoblastic leukemia (ALL). We characterized NK cells in 50 consecutive children with B-ALL at diagnosis, end induction and during maintenance therapy compared with age-matched controls. ALL-NK cells at diagnosis had an inhibitory phenotype associated with impaired function, most notably interferon-γ production and cytotoxicity. By maintenance therapy, these phenotypic and functional abnormalities partially normalized; however, cytotoxicity against autologous blasts remained impaired. We identified ALL-derived TGF-β1 to be an important mediator of leukemia-induced NK cell dysfunction. The TGF-β/SMAD signaling pathway was constitutively activated in ALL-NK cells at diagnosis and end induction when compared with healthy controls and patients during maintenance therapy. Culture of ALL blasts with healthy NK cells induced NK dysfunction and an inhibitory phenotype, mediated by activation of the TGF-β/SMAD signaling pathway, and abrogated by blocking TGF-β. These data indicate that by regulating the TGF-β/SMAD pathway, ALL blasts induce changes in NK cells to evade innate immune surveillance, thus highlighting the importance of developing novel therapies to target this inhibitory pathway and restore antileukemic cytotoxicity.