Bone morphogenetic protein-4 (BMP-4) is a multifunctional developmental regulator. BMP-4 is synthesized as an inactive precursor that is proteolytically activated by cleavage following the amino acid motif -Arg-Ser-Lys-Arg-. Very little is known about processing and secretion of BMPs. The proprotein convertases (PCs) are a family of seven structurally related serine endoproteases, at least one of which, furin, cleaves after the amino acid motif -Arg-X-Arg/Lys-Arg-. To examine potential roles of PCs during embryonic development we have misexpressed a potent protein inhibitor of furin, alpha1-antitrypsin Portland (alpha1-PDX) in early Xenopus embryos. Ectopic expression of alpha1-PDX phenocopies the effect of blocking endogenous BMP activity, leading to dorsalization of mesoderm and direct neural induction. alpha1-PDX-mediated neural induction can be reversed by co-expression of downstream components of the BMP-4 signaling pathway. Thus, alpha1-PDX can block BMP activity upstream of receptor binding, suggesting that it inhibits an endogenous BMP-4 convertase(s). Consistent with this hypothesis, alpha1-PDX prevents cleavage of BMP-4 in an oocyte translation assay. Using an in vitro digestion assay, we demonstrate that four members of the PC family have the ability to cleave BMP-4, but of these, only furin and PC6B are sensitive to alpha1-PDX. These studies provide the first in vivo evidence that furin and/or PC6 proteolytically activate BMP-4 during vertebrate embryogenesis.