Tooth development is regulated by a reciprocal series of epithelial-mesenchymal interactions. Bmp4 has been identified as a candidate signalling molecule in these interactions, initially as an epithelial signal and then later at the bud stage as a mesenchymal signal (Vainio et al.  Cell 75:45-58). A target gene for Bmp4 signalling is the homeobox gene Msx-1, identified by the ability of recombinant Bmp4 protein to induce expression in mesenchyme. There is, however, no evidence that Bmp4 is the endogenous inducer of Msx-1 expression. Msx-1 and Bmp-4 show dynamic, interactive patterns of expression in oral epithelium and ectomesenchyme during the early stages of tooth development. In this study, we compare the temporal and spatial expression of these two genes to determine whether the changing expression patterns of these genes are consistent with interactions between the two molecules. We show that changes in Bmp-4 expression precede changes in Msx-1 expression. At embryonic day (E)10.5-E11.0, expression patterns are consistent with BMP4 from the epithelium, inducing or maintaining Msx-1 in underlying mesenchyme. At E11.5, Bmp-4 expression shifts from epithelium to mesenchyme and is rapidly followed by localised up-regulation of Msx-1 expression at the sites of Bmp-4 expression. Using cultured explants of developing mandibles, we confirm that exogenous BMP4 is capable of replacing the endogenous source in epithelium and inducing Msx-1 gene expression in mesenchyme. By using noggin, a BMP inhibitor, we show that endogenous Msx-1 expression can be inhibited at E10.5 and E11.5, providing the first evidence that endogenous Bmp-4 from the epithelium is responsible for regulating the early spatial expression of Msx-1. We also show that the mesenchymal shift in Bmp-4 is responsible for up-regulating Msx-1 specifically at the sites of future tooth formation. Thus, we establish that a reciprocal series of interactions act to restrict expression of both genes to future sites of tooth formation, creating a positive feedback loop that maintains expression of both genes in tooth mesenchymal cells.