BMP signals play pivotal roles in dorsoventral patterning of vertebrate embryos. The role of Ppp4c, the catalytic subunit of ubiquitous protein phosphatase 4, in vertebrate embryonic development and underlying mechanisms is poorly understood. Here, we demonstrate that knockdown of zebrafish ppp4cb and/or ppp4ca inhibits ventral development in embryos and also blocks ventralizing activity of ectopic Smad5. Biochemical analyses reveal that Ppp4c is a direct binding partner and transcriptional coactivator of Smad1/Smad5. In response to BMP, Ppp4c is recruited to the Smad1-occupied promoter, and its phosphatase activity is essential in inhibiting HDAC3 activity and, consequently, potentiating transcriptional activation. Consistently, genetic or chemical interference of Hdac3 expression or activity compromises the dorsalizing phenotype induced by ppp4cb knockdown. We conclude that Ppp4c is a critical positive regulator of BMP/Smad signaling during embryonic dorsoventral pattern formation in zebrafish.