Caveolin-3, the muscle-specific isoform of caveolins, plays important roles in signal transduction. Dominant-negative mutations of the caveolin-3 gene cause autosomal dominant limb-girdle muscular dystrophy 1C (LGMD1C) with loss of caveolin-3. However, identification of the precise molecular mechanism leading to muscular atrophy in caveolin-3–deficient muscle has remained elusive. Myostatin, a member of the muscle-specific TGF-β superfamily, negatively regulates skeletal muscle volume. Here we report that caveolin-3 inhibited myostatin signaling by suppressing activation of its type I receptor; this was followed by hypophosphorylation of an intracellular effector, Mad homolog 2 (Smad2), and decreased downstream transcriptional activity. Loss of caveolin-3 in P104L mutant caveolin-3 transgenic mice caused muscular atrophy with increase in phosphorylated Smad2 (p-Smad2) as well as p21 (also known as Cdkn1a), a myostatin target gene. Introduction of the myostatin prodomain, an inhibitor of myostatin, by genetic crossing or intraperitoneal administration of the soluble type II myostatin receptor, another inhibitor, ameliorated muscular atrophy of the mutant caveolin-3 transgenic mice with suppression of p-Smad2 and p21 levels. These findings suggest that caveolin-3 normally suppresses the myostatin-mediated signal, thereby preventing muscular atrophy, and that hyperactivation of myostatin signaling participates in the pathogenesis of muscular atrophy in a mouse model of LGMD1C. Myostatin inhibition may be a promising therapy for LGMD1C patients.