During spinal cord development, the combination of secreted signaling proteins and transcription factors provides information for each neural type differentiation. Studies using embryonic stem cells show that trimethylation of lysine 27 of histone H3 (H3K27me3) contributes to repression of many genes key for neural development. However, it remains unclear how H3K27me3-mediated mechanisms control neurogenesis in developing spinal cord. Here, we demonstrate that H3K27me3 controls dorsal interneuron generation by regulation of BMP activity. Our study indicates that expression of Noggin, a BMP extracellular inhibitor, is repressed by H3K27me3. Moreover, we show that Noggin expression is induced by BMP pathway signaling, generating a negative-feedback regulatory loop. In response to BMP pathway activation, JMJD3 histone demethylase interacts with the Smad1/Smad4 complex to demethylate and activate the Noggin promoter. Together, our data reveal how the BMP signaling pathway restricts its own activity in developing spinal cord by modulating H3K27me3 levels at the Noggin promoter.