The murine tooth development is governed by sequential and reciprocal epithelial-mesenchymal interactions. Multiple signaling molecules are expressed in the developing tooth germ and interact each other to mediate the inductive tissue interactions. Among them are Sonic hedgehog (SHH), Bone Morphogenetic Protein-2 (BMP2) and Bone Morphogenetic Protein-4 (BMP4). We have investigated the interactions between these signaling molecules during early tooth development. We found that the expression of Shh and Bmp2 is downregulated at E12.5 and E13.5 in the dental epithelium of the Msx1 mutant tooth germ where Bmp4 expression is significantly reduced in the dental mesenchyme. Inhibition of BMP4 activity by noggin resulted in repression of Shh and Bmp2 in wild-type dental epithelium. When implanted into the dental mesenchyme of Msx1 mutants, beads soaked with BMP4 protein were able to restore the expression of both Shh and Bmp2 in the Msx1 mutant epithelium. These results demonstrated that mesenchymal BMP4 represents one component of the signal acting on the epithelium to maintain Shh and Bmp2 expression. In contrast, BMP4-soaked beads repressed Shh and Bmp2 expression in the wild-type dental epithelium. TUNEL assay indicated that this suppression of gene expression by exogenous BMP4 was not the result of an increase in programmed cell death in the tooth germ. Ectopic expression of human Bmp4 to the dental mesenchyme driven by the mouse Msx1 promoter restored Shh expression in the Msx1 mutant dental epithelium but repressed Shh in the wild-type tooth germ in vivo. We further demonstrated that this regulation of Shh expression by BMP4 is conserved in the mouse developing limb bud. In addition, Shh expression was unaffected in the developing limb buds of the transgenic mice in which a constitutively active Bmpr-IB is ectopically expressed in the forelimb posterior mesenchyme and throughout the hindlimb mesenchyme, suggesting that the repression of Shh expression by BMP4 may not be mediated by BMP receptor-IB. These results provide evidence for a new function of BMP4. BMP4 can act upstream to Shh by regulating Shh expression in mouse developing tooth germ and limb bud. Taken together, our data provide insight into a new regulatory mechanism for Shh expression, and suggest that this BMP4-mediated pathway in Shh regulation may have a general implication in vertebrate organogenesis.