At E4.0 the inner cell mass of the mouse blastocyst consists of a core of embryonic ectoderm cells surrounded by an outer layer of primitive (extraembryonic) endoderm, which subsequently gives rise to both visceral endoderm and parietal endoderm. Shortly after blastocyst implantation, the solid mass of ectoderm cells is converted by a process known as cavitation into a pseudostratified columnar epithelium surrounding a central cavity. We have previously used two cell lines, which form embryoid bodies that do (PSA1) or do not (S2) cavitate, as an in vitro model system for studying the mechanism of cavitation in the early embryo. We provided evidence that cavitation is the result of both programmed cell death and selective cell survival, and that the process depends on signals from visceral endoderm (Coucouvanis, E. and Martin, G. R. (1995) Cell 83, 279-287). Here we show that Bmp2 and Bmp4 are expressed in PSA1 embryoid bodies and embryos at the stages when visceral endoderm differentiation and cavitation are occurring, and that blocking BMP signaling via expression of a transgene encoding a dominant negative mutant form of BMP receptor IB inhibits expression of the visceral endoderm marker, Hnf4, and prevents cavitation in PSA1 embryoid bodies. Furthermore, we show that addition of BMP protein to cultures of S2 embryoid bodies induces expression of Hnf4 and other visceral endoderm markers and also cavitation. Taken together, these data indicate that BMP signaling is both capable of promoting, and required for differentiation of, visceral endoderm and cavitation of embryoid bodies. Based on these and other data, we propose a model for the role of BMP signaling during peri-implantation stages of mouse embryo development.