Although KSHV exerts multiple mechanisms to promote cell survival by repressing TGF-β signaling, little is known whether KSHV manipulates BMP signaling and contributes to the pathogenesis of KSHV-induced malignancies. In the present study, we have identified Smad1 as a novel binding protein of LANA by tandem affinity purification. We demonstrated that LANA up-regulated Id transcription through BMP-Smad1-Id signaling pathway. Id proteins were significantly up-regulated in KSHV-transformed MM (KMM) cells, and were abundantly expressed in human KS lesions; therefore, they were probably relevant to the development of KS. Importantly, we have shown that Ids are required to maintain the oncogenic phenotype of KMM cells in vitro and in vivo. These findings illustrate a novel mechanism by which a tumor virus hijacks and converts a developmental pathway into an indispensable oncogenic pathway for tumorigenesis. Furthermore, we showed that BMP signaling inhibitors dramatically hampered the tumorigenicity of KMM cells in vitro and in vivo. Our results demonstrate that small inhibitors targeting BMP-Smad1-Id signaling pathway are promising candidates for the treatment of KS.