Gene duplication and divergence is widely considered to be a fundamental mechanism for generating evolutionary novelties. The Bone Morphogenetic Proteins (BMPs) are a diverse family of signalling molecules found in all metazoan genomes that have evolved by duplication and divergence from a small number of ancestral types. In the fruit fly Drosophila, there are three BMPs: Decapentaplegic (Dpp) and Glass bottom boat (Gbb), which are the orthologues of vertebrate BMP2/4 and BMP5/6/7/8, respectively, and Screw (Scw), which, at the sequence level, is equally divergent from Dpp and Gbb. It has recently been shown that Scw has arisen from a duplication of Gbb in the lineage leading to higher Diptera. We show that since this duplication event, Gbb has maintained the ancestral BMP5/6/7/8 functionality while Scw has rapidly diverged. The evolution of Scw was accompanied by duplication and divergence of a suite of extracellular regulators that continue to diverge together in the higher Diptera. In addition, Scw has become restricted in its receptor specificity: Gbb proteins can signal through the Type I receptors Thick veins (Tkv) and Saxophone (Sax), while Scw signals through Sax. Thus, in a relatively short span of evolutionary time, the duplication event that gave rise to Scw produced not only a novel ligand but also a novel signalling mode that is functionally distinct from the ancestral Gbb mode. Our results demonstrate the plasticity of the BMP pathway not only in evolving new family members and new functions but also new signalling modes by redeploying key regulators in the pathway.