The cellular response to the Drosophila BMP 2/4-like ligand Decapentaplegic (DPP) serves as one of the best-studied models for understanding the long-range control of tissue growth and pattern formation during animal development. Nevertheless, fundamental questions remain unanswered regarding extracellular regulation of the ligand itself, as well as the nature of the downstream transcriptional response to BMP pathway activation. Here, we report the identification of larval translucida (ltl), a novel target of BMP activity in Drosophila. Both gain- and loss-of-function analyses implicate LTL, a leucine-rich repeat protein, in the regulation of wing growth and vein patterning. At the molecular level, we demonstrate that LTL is a secreted protein that antagonizes BMP-dependent MAD phosphorylation, indicating that it regulates DPP/BMP signaling at or above the level of ligand-receptor interactions. Furthermore, based on genetic interactions with the DPP-binding protein Crossveinless 2 and biochemical interactions with the glypican Dally-like, we propose that LTL acts in the extracellular space where it completes a novel auto-regulatory loop that modulates BMP activity.