Dorsoventral patterning depends on the local concentrations of the morphogens. Twisted gastrulation (TSG) regulates the extracellular availability of a mesoderm inducer, bone morphogenetic protein 4 (BMP-4). However, TSG function in vivo is still unclear. We isolated a TSG cDNA as a secreted molecule from the mouse aorta-gonad-mesonephros region. Here we show that TSG-deficient mice were born healthy, but more than half of the neonatal pups showed severe growth retardation shortly after birth and displayed dwarfism with delayed endochondral ossification and lymphopenia, followed by death within a month. TSG-deficient thymus was atrophic, and phosphorylation of SMAD1 was augmented in the thymocytes, suggesting enhanced BMP-4 signaling in the thymus. Since BMP-4 promotes skeletogenesis and inhibits thymus development, our findings suggest that TSG acts as both a BMP-4 agonist in skeletogenesis and a BMP-4 antagonist in T-cell development. Although lymphopenia in TSG-deficient mice would partly be ascribed to systemic effects of runtiness and wasting, our findings may also provide a clue for understanding the pathogenesis of human dwarfism with combined immunodeficiency.