The mature C-terminal signaling domain of the Drosophila Decapentaplegic proprotein (DPP) can be efficiently refolded from chaotrope-solubilized inclusion bodies with the aid of a membrane protein-solubilizing detergent, high concentrations (0.75-2 M) of NaCl, and low temperatures (5-15 degreesC). The disulfide-linked homodimeric product contains N-terminal heparin-binding sites that were utilized as intrinsic affinity tags to obtain a highly enriched preparation in one chromatographic step. A subsequent C4 reverse phase high pressure liquid chromatography step provides high purity, salt-free protein that is amenable to biophysical and structural studies at a yield of approximately 3 mg/liter of bacterial culture. The dimeric protein is correctly folded as determined by electrophoretic, spectroscopic, chemical, and proteolytic analyses. Refolded DPP is also bioactive as shown by induction of chondrogenesis in embryonic chick limb bud cells and by high affinity binding to Noggin, an antagonist of bone morphogenetic protein signaling. In contrast to bone morphogenetic proteins extracted from demineralized bone or overexpressed in cell culture, the refolded Escherichia coli-expressed protein is not glycosylated at a conserved N-linked site and is therefore homogeneous. The C-terminal domain dimer is more hydrophobic and thus less soluble than its unfolded or partially folded forms, necessitating highly solubilizing conditions for recovery after folding in vitro. Hence solubilization of the mature ligand may be one of the principal roles of the large (250-400 amino acids) N-terminal prodomains of transforming growth factor-beta superfamily members, shown to act as intramolecular chaperones in vivo.