In the Drosophila ovary, germline stem cells (GSCs) are maintained primarily by bone morphogenetic protein (BMP) ligands produced by the stromal cells of the niche. This signaling represses GSC differentiation by blocking the transcription of the differentiation factor Bam. Remarkably, bam transcription begins only one cell diameter away from the GSC in the daughter cystoblasts (CBs). How this steep gradient of response to BMP signaling is formed has been unclear. Here, we show that Fused (Fu), a serine/threonine kinase that regulates Hedgehog, functions in concert with the E3 ligase Smurf to regulate ubiquitination and proteolysis of the BMP receptor Thickveins in CBs. This regulation generates a steep gradient of BMP activity between GSCs and CBs, allowing for bam expression on CBs and concomitant differentiation. We observed similar roles for Fu during embryonic development in zebrafish and in human cell culture, implying broad conservation of this mechanism.