Highly purified fractions of bone extracts capable of inducing ectopic bone formation have been reported to contain peptides corresponding to the mature active regions of the TGF-beta-like bone morphogenetic proteins (BMPs) 2-7, and to the prodomain region of the metalloproteinase BMP1. Co-purification of BMPs 2-7 with BMP1 prodomain sequences through the multiple biochemical steps used in these previous reports has suggested the possibility of interactions between the BMP1 prodomain and BMPs 2-7. Here we demonstrate that the BMP1 prodomain binds BMPs 2 and 4 with high specificity and with a KD of approximately 11 nM, in the physiological range. It is further demonstrated that the BMP1 prodomain is capable of modulating signaling by BMPs 2 and 4 in vitro and in vivo, and that endogenous BMP1 prodomain-BMP4 complexes exist in cell culture media and in tissues.