The evolutionarily conserved, secreted protein Twisted gastrulation (Tsg) modulates morphogenetic effects of decapentaplegic (dpp) and its orthologs, the bone morphogenetic proteins 2 and 4 (BMP2/4), in early Drosophila and vertebrate embryos. We have uncovered a role for Tsg at a much later stage of mammalian development, during T cell differentiation in the thymus. BMP4 is expressed by thymic stroma and inhibits the proliferation of CD4(-)CD8(-) double-negative (DN) thymocytes and their differentiation to the CD4(+)CD8(+) double-positive (DP) stage in vitro. Tsg is expressed by thymocytes and up-regulated after T cell receptor signaling at two developmental checkpoints, the transition from the DN to the DP and from the DP to the CD4(+) or CD8(+) single-positive stage. Tsg can synergize with the BMP inhibitor chordin to block the BMP4-mediated inhibition of thymocyte proliferation and differentiation. These data suggest that the developmentally regulated expression of Tsg may allow thymocytes to temporarily withdraw from inhibitory BMP signals.