Bone morphogenetic protein (BMP) signaling is thought to perform multiple functions in the regulation of skin appendage morphogenesis and the postnatal growth of hair follicles. However, definitive genetic evidence for these roles has been lacking. Here, we show that Cre-mediated mutation of the gene encoding BMP receptor 1A in the surface epithelium and its derivatives causes arrest of tooth morphogenesis and lack of external hair. The hair shaft and hair follicle inner root sheath (IRS) fail to differentiate, and expression of the known transcriptional regulators of follicular differentiation Msx1, Msx2, Foxn1 and Gata3 is markedly downregulated or absent in mutant follicles. Lef1 expression is maintained, but nuclear beta-catenin is absent from the epithelium of severely affected mutant follicles, indicating that activation of the WNT pathway lies downstream of BMPR1A signaling in postnatal follicles. Mutant hair follicles fail to undergo programmed regression, and instead continue to proliferate, producing follicular cysts and matricomas. These results provide definitive genetic evidence that epithelial Bmpr1a is required for completion of tooth morphogenesis, and regulates terminal differentiation and proliferation in postnatal hair follicles.