p63, a p53 family member, plays an essential role in epidermal development by regulating its transcriptional program. Here we report a previously uncovered role of p63 in controlling bone morphogenetic protein (BMP) signaling, which is required for maintaining low expression levels of several non-epidermal genes. p63 represses transcription of the inhibitory Smad7 and activates Bmp7, thereby sustaining BMP signaling. In the absence of p63, compromised BMP signaling leads to inappropriate non-epidermal gene expression in postnatal mouse keratinocytes and in embryonic epidermis. Reactivation of BMP signaling by Smad7 knockdown and/or, to a lesser extent, by BMP treatment suppresses expression of non-epidermal genes in the absence of p63. Canonical BMP/Smad signaling is essential for control of non-epidermal genes as use of a specific inhibitor, or simultaneous knockdown of Smad1 and Smad5 counteract suppression of non-epidermal genes. Our data indicate that p63 prevents ectopic expression of non-epidermal genes by a mechanism involving Smad7 repression and, to a lesser extent, Bmp7 induction, with consequent enhancement of BMP/Smad signaling.