Recent work suggests that signaling molecules such as activin are capable of acting at long range to establish a morphogen gradient in the amphibian embryo and that responding cells activate different genes at distinct threshold levels of activin. Other signaling molecules like BMP-4 and Xnr-2 also exert concentration-dependent effects, but these factors appear to diffuse less freely. This raises the question of whether gradients of these inducing factors are indeed established, and if so, how they are generated. In this paper we demonstrate directly that BMP-4 elicits graded responses in gastrula-stage embryos. We then show that an effective BMP-4 gradient is established not by diffusion of BMP-4 protein but by the long-range effects of two BMP-4 inhibitors, noggin and chordin. This provides a novel mechanism for the establishment of a morphogen gradient in vertebrate embryos.