The available experimental data support the hypothesis that the cap cells (CpCs) at the anterior tip of the germarium form an environmental niche for germline stem cells (GSCs) of the Drosophila ovary. Each GSC undergoes an asymmetric self-renewal division that gives rise to both a GSC, which remains associated with the CpCs, and a more posterior located cystoblast (CB). The CB upregulates expression of the novel gene, bag of marbles (bam), which is necessary for germline differentiation. Decapentaplegic (Dpp), a BMP2/4 homologue, has been postulated to act as a highly localized niche signal that maintains a GSC fate solely by repressing bam transcription. Here, we further examine the role of Dpp in GSC maintenance. In contrast to the above model, we find that an enhancer trap inserted near the Dpp target gene, Daughters against Dpp (Dad), is expressed in additional somatic cells within the germarium, suggesting that Dpp protein may be distributed throughout the anterior germarium. However, Dad-lacZ expression within the germline is present only in GSCs and to a lower level in CBs, suggesting there are mechanisms that actively restrict Dpp signaling in germ cells. We demonstrate that one function of Bam is to block Dpp signaling downstream of Dpp receptor activation, thus establishing the existence of a negative feedback loop between the action of the two genes. Moreover, in females doubly mutant for bam and the ubiquitin protein ligase Smurf, the number of germ cells responsive to Dpp is greatly increased relative to the number observed in either single mutant. These data indicate that there are multiple, genetically redundant mechanisms that act within the germline to downregulate Dpp signaling in the Cb and its descendants, and raise the possibility that a Cb and its descendants must become refractory to Dpp signaling in order for germline differentiation to occur.