Signalling proteins in the BMP-decapentaplegic (dpp), WNT-wingless (wg) and Shh-hedgehog (hh) families have been implicated in limb and appendage development in both invertebrates and vertebrates. In Drosophila, dpp protein (Dpp) induces distal outgrowth and patterning of legs and wings, but the molecular responses to Dpp are not well characterized. Analysis of clones mutant for the Dpp receptors encoded by punt or thickveins (tkv) reveals that repression of wg expression is one critical function of Dpp signalling in leg and wing discs. Distal clones that lie on the anterior edge of the anterior-posterior compartment boundary ectopically express wg and cause pattern abnormalities, suggesting that Dpp represses Hh activation of wg in the distal primordia of the leg and wing. By repressing wg expression in the leg, Dpp signalling limits the region that responds to high levels of Wg and Dpp to the site of distal outgrowth. Such negative regulatory feedback loops between signalling molecules are likely to be critical for limb patterning in other species.