Mandibular development is regulated by an interplay between a specified branchial arch ectoderm and a plastic mesenchyme. Moreover, signaling from the pharyngeal endoderm has been shown to be important for mandibular morphogenesis. To gain insight into the mechanisms regulating mandibular pattern, it is important to investigate the function of the epithelial-derived signals. Bmp4 is expressed in both distal, mandibular arch ectoderm and pharyngeal endoderm. Here, we show that deletion of Bmp4 in the mandibular ectoderm and to a lesser extent in the pharyngeal endoderm, resulted in severe defects in mandibular development. Furthermore, our data uncovered different Bmp4 thresholds for expression of the Bmp-dependent Msx1 and Msx2 genes in mandibular mesenchyme. We also found that ectodermal Fgf8 expression was both activated and repressed by Bmp4 in a dosage-dependent fashion indicating a novel Bmp4 function in threshold-specific regulation of Fgf8 transcription. Lastly, we provide evidence that Prx homeobox genes repress expression of an Msx2 transgene, previously shown to be Bmp4-responsive, revealing a mechanism for differential regulation of Msx1 and Msx2 by Bmp signaling.