OBJECTIVE Pancreas organogenesis is orchestrated by interactions between the epithelium and the mesenchyme, but these interactions are not completely understood. Here we investigated a role for bone morphogenetic protein (BMP) signaling within the pancreas mesenchyme and found it to be required for the normal development of the mesenchyme as well as for the pancreatic epithelium. RESEARCH DESIGN AND METHODS We analyzed active BMP signaling by immunostaining for phospho-Smad1,5,8 and tested whether pancreas development was affected by BMP inhibition after expression of Noggin and dominant negative BMP receptors in chicken and mouse pancreas. RESULTS Endogenous BMP signaling is confined to the mesenchyme in the early pancreas and inhibition of BMP signaling results in severe pancreatic hypoplasia with reduced epithelial branching. Notably, we also observed an excessive endocrine differentiation when mesenchymal BMP signaling is blocked, presumably secondary to defective mesenchyme to epithelium signaling. CONCLUSIONS We conclude that BMP signaling plays a previously unsuspected role in the mesenchyme, required for normal development of the mesenchyme as well as for the epithelium.