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Members of the Msx homeobox family are thought to play important roles in inductive tissue interactions during vertebrate organogenesis, but their precise developmental function has been unclear. Mice deficient for Msx1 exhibit defects in craniofacial development and a failure of tooth morphogenesis, with an arrest in molar tooth development at the E13.5 bud stage. Because of its potential for experimental manipulation, the murine molar tooth germ provides a powerful system for studying the role of Msx genes in inductive signaling during organogenesis. To further analyze the role of Msx1 in regulating epithelial-mesenchymal interactions during tooth morphogenesis, we have examined the expression of several potential Msx1 downstream genes in Msx1 mutant tooth germs and we have performed functional experiments designed to order these genes into a pathway. Our results show that expression of Bone Morphogenetic Protein 4 (BMP4), the HMG box gene Lef1 and the heparan sulfate proteoglycan syndecan-1 is specifically reduced in Msx1 mutant dental mesenchyme, while expression of the extracellular matrix protein tenascin is unaffected. BMP4 soaked beads can induce Bmp4 and Lef1 expression in explanted wild-type dental mesenchymes, but only Lef1 expression in Msx1 mutant dental mesenchyme. We thus conclude that epithelial BMP4 induces its own expression in dental mesenchyme in a manner that requires Msx1. In turn, we show that addition of BMP4 to Msx1 deficient tooth germs bypasses the requirement for Msx1 and rescues epithelial development from the bud stage to the E14.5 cap stage. Lastly, we show that FGFs induce syndecan-1 expression in dental mesenchyme in a manner that also requires Msx-1. These results integrate Msx1 into a regulatory hierarchy in early tooth morphogenesis and demonstrate that Msx1 is not only expressed in dental mesenchyme in response to epithelial signals, but also in turn regulates the reciprocal expression of inductive signals in the mesenchyme which then act back upon the dental epithelium. We propose that Msx genes function repetitively during vertebrate organogenesis to permit inductive signaling to occur back and forth between tissue layers.