Transforming growth factor (TGF)-β family members exert strong effects on restoration of liver mass after injury. Bone morphogenetic proteins (BMPs) are members of the TGF-β family and are found in the liver, suggesting that these proteins may play a role in liver regeneration. We examined BMP signaling in the liver during hepatectomy. We found that BMP4 is constitutively expressed in the peribiliary stroma and endothelial cells of the liver and that expression is decreased after hepatectomy. Mice driven to maintain BMP4 expression in the liver display inhibited hepatocyte proliferation and restoration of liver mass after hepatectomy, suggesting that reduced BMP4 is necessary for normal regeneration. Consistent with this finding, hepatocyte-specific deletion of the BMP receptor activin receptor-like kinase 3 (Alk3) enhances regeneration and reduces phosphorylation of SMAD1/5/8, a transducer of BMP signaling. In contrast to experiments in wild-type mice, maintaining BMP4 levels has no effect on liver regeneration in hepatocyte-specific Alk3 null mice, providing evidence that BMP4 signals through Alk3 to inhibit liver regeneration. Consistent with these findings, the BMP4 antagonist Noggin enhances regeneration. Furthermore, high-dose BMP4 inhibits proliferation of primary hepatocytes and HepG2 cells in culture. These findings elucidate a new, potentially clinically relevant paradigm in which a constitutively expressed paracrine inhibitory factor plays a critical role in liver regeneration.