Antagonists of several growth factor signaling pathways play important roles in developmental patterning by limiting the range of the cognate inducer. Here, we describe an antagonist of FGF signaling that patterns apical branching of the Drosophila airways. In wild-type embryos, the Branchless FGF induces secondary branching by activating the Breathless FGF receptor near the tips of growing primary branches. In sprouty mutants, the FGF pathway is overactive and ectopic branches are induced on the stalks of primary branches. We show that FGF signaling induces sprouty expression in the nearby tip cells, and sprouty acts nonautonomously and in a competitive fashion to block signaling to the more distant stalk cells. sprouty encodes a novel cysteine-rich protein that defines a new family of putative signaling molecules that may similarly function as FGF antagonists in vertebrate development.