Disruption of latent TGF-β binding protein (LTBP)–4 expression in the mouse leads to abnormal lung development and colorectal cancer. Lung fibroblasts from these mice produced decreased amounts of active TGF-β, whereas secretion of latent TGF-β was significantly increased. Expression and secretion of TGF-β2 and -β3 increased considerably. These results suggested that TGF-β activation but not secretion would be severely impaired in LTBP-4 −/− fibroblasts. Microarrays revealed increased expression of bone morphogenic protein (BMP)–4 and decreased expression of its inhibitor gremlin. This finding was accompanied by enhanced expression of BMP-4 target genes, inhibitors of differentiation 1 and 2, and increased deposition of fibronectin-rich extracellular matrix. Accordingly, increased expression of BMP-4 and decreased expression of gremlin were observed in mouse lung. Transfection of LTBP-4 rescued the −/− fibroblast phenotype, while LTBP-1 was inefficient. Treatment with active TGF-β1 rescued BMP-4 and gremlin expression to wild-type levels. Our results indicate that the lack of LTBP-4–mediated targeting and activation of TGF-β1 leads to enhanced BMP-4 signaling in mouse lung.