Bone morphogenetic proteins (BMPs), a large subgroup of the TGF-beta family of secreted growth factors, control fundamental events in early embryonic development, organogenesis and adult tissue homeostasis. The plethora of dose-dependent cellular processes regulated by BMP signalling demand a tight regulation of BMP activity. Over the last decade, a number of proteins have been identified that bind BMPs in the extracellular space and regulate the interaction of BMPs with their cognate receptors, including the secreted BMP antagonist Chordin. In the early vertebrate embryo, the localized secretion of BMP antagonists from the dorsal blastopore lip establishes a functional BMP signalling gradient that is required for the determination of the dorsoventral - or back to belly - body axis. In particular, inhibition of BMP activity is essential for the formation of neural tissue in the development of vertebrate and invertebrate embryos. Here we review recent studies that have provided new insight into the regulation of BMP signalling in the extracellular space. In particular, we discuss the recently identified Twisted gastrulation protein that modulates, in concert with metalloproteinases of the Tolloid family, the interaction of Chordin with BMP and a family of proteins that share structural similarities with Chordin in the respective BMP binding domains. In addition, genetic and functional studies in zebrafish and frog provide compelling evidence that the secreted protein Sizzled functionally interacts with the Chd-BMP pathway, despite being expressed ventrally in the early gastrula-stage embryo. These intriguing discoveries may have important implications, not only for our current concept of early embryonic patterning, but also for the regulation of BMP activity at later developmental stages and tissue homeostasis in the adult.