Abstract Proper outgrowth of the limb bud requires a positive feedback loop between Sonic hedgehog ( Shh) in the zone of polarizing activity (ZPA) and Fgfs in the overlying apical ectodermal ridge. The Bmp antagonist Gremlin is expressed in a domain anterior to the ZPA and is thought to act as a signaling intermediate between Shh and Fgf. It is currently unclear whether Shh acts directly or indirectly to initiate and maintain Gremlin. In this study, we confirm that Bmp activity is necessary and sufficient for induction of Gremlin. Beads soaked in the Bmp antagonist Noggin downregulate Gremlin, while beads soaked in Bmp2 cause its upregulation. Furthermore, Bmp2 is also capable of upregulating Gremlin in oligozeugodactyly mutant limbs that lack Shh activity, demonstrating that Gremlin expression does not depend on the combined exposure to both these factors. In spite of the ability of Bmp2 to induce Gremlin, beads soaked in high concentrations of Bmp2 downregulate Gremlin around the bead without apparent induction of cell death, whereas another target gene Msx2 is upregulated around the bead. Consistent with this concentration-dependent effect, we find that low concentrations of Bmp2 upregulate Gremlin while high concentrations of Bmp2 downregulate Gremlin in limb mesenchyme cultures. These data implicate Bmp activity as a required intermediate in the Shh–Fgf4 signaling loop. Though we show that Bmp activity is sufficient to upregulate Gremlin, Gremlin expression is excluded from a posterior domain of the limb, and expansion of this domain as limb outgrowth proceeds is important in terminating the Shh–Fgf4 signaling loop. We find that the posterior limb is refractory to Gremlin induction in response to Bmp2, suggesting that termination of the Shh–Fgf4 signaling loop results from inability of Bmp activity to induce Gremlin in the posterior. In contrast, in the oligozeugodactyly limb, we find that beads soaked in Bmp2 can induce Gremlin in the posterior, demonstrating that Shh activity is required for exclusion of Gremlin in the posterior. Finally, by blocking Shh activity with cyclopamine, we find evidence that continued Shh activity is also required to maintain refractoriness to Gremlin expression in response to Bmp activity.