The embryonic body plan is established through positive and negative control of various signaling cascades. Late endosomes and lysosomes are thought to terminate signal transduction by compartmentalizing the signaling molecules; however, their roles in embryogenesis remain poorly understood. We showed here that the endocytic pathway participates in the developmental program by regulating the signaling activity. We modified the mouse Vam2 (mVam2) locus encoding a regulator of membrane trafficking. mVam2-deficient cells exhibited abnormally fragmented late endosomal compartments. The mutant cells could terminate signaling after the removal of the growth factors including TGF-β and EGF, except BMP-Smad1/Smad5 signaling. mVam2-deficient embryos exhibited ectopic activation of BMP signaling and disorganization of embryo patterning. We found that mVam2, which interacts with BMP type I receptor, is required for the spatiotemporal modulation of BMP signaling, via sequestration of the receptor complex in the late stages of the endocytic pathway.