Twisted gastrulation (Tsg) is a secreted protein that regulates Bmp signaling in the extracellular space through its direct interaction with Bmp/Dpp and Chordin (Chd)/Short gastrulation (Sog). The ternary complex of Tsg/Chd/Bmp is cleaved by the metalloprotease Tolloid (Tld)/Xolloid (Xld). Studies in Drosophila, Xenopus and zebrafish suggest that Tsg can act both as an anti-Bmp and as a pro-Bmp. We have analyzed Tsg loss-of-function in the mouse. Tsg homozygous mutants are viable but of smaller size and display mild vertebral abnormalities and osteoporosis. We provide evidence that Tsg interacts genetically with Bmp4. When only one copy of Bmp4 is present, a requirement of Tsg for embryonic development is revealed. Tsg-/-;Bmp4+/- compound mutants die at birth and display holoprosencephaly, first branchial arch and eye defects. The results show that Tsg functions to promote Bmp4 signaling during mouse head development.