The family of TGF-beta signalling molecules play inductive roles in various developmental contexts. One member of this family, Drosophila Decapentaplegic (Dpp) serves as a morphogen that patterns both the embryo and adult. We have now isolated a gene, Daughters against dpp (Dad), whose transcription is induced by Dpp. Dad shares weak homology with Drosophila Mad (Mothers against dpp), a protein required for transduction of Dpp signals. In contrast to Mad or the activated Dpp receptor, whose overexpression hyperactivates the Dpp signalling pathway, overexpression of Dad blocks Dpp activity. Expression of Dad together with either Mad or the activated receptor rescues phenotypic defects induced by each protein alone. Dad can also antagonize the activity of a vertebrate homologue of Dpp, bone morphogenetic protein, as evidenced by induction of dorsal or neural fate following overexpression in Xenopus embryos. We conclude that the pattern-organizing mechanism governed by Dpp involves a negative-feedback circuit in which Dpp induces expression of its own antagonist, Dad. This feedback loop appears to be conserved in vertebrate development.