We have identified mouse and human cDNAs encoding a novel secreted BMP inhibitor, which we have named ectodin. It is most homologous (approximately 37% amino acid identity) to sclerostin that is a secreted BMP antagonist. Recombinant ectodin protein produced in cultured cells was efficiently secreted as a antagonist. Ectodin inhibited the activity of BMP2, BMP4, BMP6, and BMP7 for mouse preosteoblastic MC3T3-E1 cells, and bound to these BMPs with high affinity. Ectodin is intensely expressed in developing ectodermal organs, including teeth, vibrissae, and hair follicles. However, it is absent from the hair placodes and from the enamel knot signaling centers in teeth. In addition, several cell layers surrounding the enamel knots were completely devoid of ectodin transcripts. We analyzed the regulation and function of ectodin in tooth germs. Recombinant ectodin protein antagonized the BMP-mediated induction of Msx2 expression in cultured tooth explants, indicating that ectodin is a secreted BMP inhibitor. BMP2 and BMP7 stimulated ectodin expression in tooth explants, showing that it is part of a feedback mechanism controlling the activity of BMPs. The stimulation of ectodin expression by BMP was prevented by SHH and FGF4 but not by Wnt6. Hence, the feedback mechanism whereby BMPs upregulate their own inhibitor is counteracted by signals coexpressed with BMPs in the enamel knot. We conclude that ectodin is a novel BMP inhibitor which integrates BMP signaling with the SHH and FGF signal pathways and contributes in defining the exact spatiotemporal domain of BMP target field around the ectodermal signaling centers.