During early development, cells receive positional information from neighboring cells to form tissue patterns in initially uniform germ layers. Ligands of the transforming growth factor (TGF-β) superfamily are known to participate in this pattern formation. In particular, activin has been shown to act as a long-range dorsalizing signal to establish a concentration gradient in Xenopus. In contrast, BMP-2 and BMP-4, other members of the family, appear to influence and induce ventral fates only where they are expressed. This raises a question as to how the action of BMPs is tightly restricted to the region within and around the cells that produce them. Here, we have demonstrated that a basic core of only three amino acids in the N-terminal region of BMP-4 is required for its restriction to the non-neural ectoderm as its expression domain. Our results also suggest that heparan sulfate proteoglycans bind to this basic core and thus play a role in trapping BMP-4. The present study is the first to identify the critical domain of BMP that is responsible for its interaction with the extracellular environment that restricts its diffusion in vivo.