Bone morphogenetic protein-4 (BMP-4) is a multifunctional developmental regulator. BMP-4 is synthesized as an inactive precursor that is proteolytically activated by cleavage following the amino acid motif-Arg-Ser-Lys-Arg-. Very little is known about processing and secretion of BMPs. The proprotein convertases (PCs) are a family of seven structurally related serine endoproteases, at least one of which, furin, cleaves after the amino acid motif-Arg-X-Arg/Lys-Arg-. To examine potential roles of PCs during embryonic development we have misexpressed a potent protein inhibitor of furin, α 1-antitrypsin Portland (α 1-PDX) in early Xenopus embryos. Ectopic expression of α 1-PDX phenocopies the effect of blocking endogenous BMP activity, leading to dorsalization of mesoderm and direct neural induction. α 1-PDX-mediated neural induction can be reversed by co-expression of downstream components of the BMP-4 signaling pathway. Thus, α 1-PDX can block BMP activity upstream of receptor binding, suggesting that it inhibits an endogenous BMP-4 convertase (s). Consistent with this hypothesis, α 1-PDX prevents cleavage of BMP-4 in an oocyte translation assay. Using an in vitro digestion assay, we demonstrate that four members of the PC family have the ability to cleave BMP-4, but of these, only furin and PC6B are sensitive to α 1-PDX. These studies provide the first in vivo evidence that furin and/or PC6 proteolytically activate BMP-4 during vertebrate embryogenesis.