Decapentaplegic (Dpp) signaling determines the number of cells that migrate dorsally to form the dorsal primary branch during tracheal development. We report that Dpp signaling is also required for the differentiation of one of three different cell types in the dorsal branches, the fusion cell. In Mad mutant embryos or in embryos expressing dominant negative constructs of the two type I Dpp receptors in the trachea the number of cells expressing fusion cell-specific marker genes is reduced and fusion of the dorsal branches is defective. Ectopic expression of Dpp or the activated form of the Dpp receptor Tkv in all tracheal cells induces ectopic fusions of the tracheal lumen and ectopic expression of fusion gene markers in all tracheal branches. Among the fusion marker genes that are activated in the trachea in response to ectopic Dpp signaling is Delta. In conditional Notch loss of function mutants additional tracheal cells adopt the fusion cell fate and ectopic expression of an activated form of the Notch receptor in fusion cells results in suppression of fusion cell markers and disruption of the branch fusion. The number of cells that express the fusion cell markers in response to ectopic Dpp signaling is increased in Notch(ts1) mutants, suggesting that the two signaling pathways have opposing effects in the selection of the fusion cells in the dorsal branches.