Inductive signals from adjacent tissues initiate differentiation within the somite. In this study, we used mouse embryos mutant for the BMP antagonists noggin (Nog) and gremlin 1 (Grem1) to characterize the effects of BMP signaling on the specification of the sclerotome. We confirmed reduction of Pax1 and Pax9 expression in Nog mutants, but found that Nog;Grem1 double mutants completely fail to initiate sclerotome development. Furthermore, Nog mutants that also lack one allele of Grem1 exhibit a dramatic reduction in axial skeleton relative to animals mutant for Nog alone. By contrast, Pax3, Myf5 and Lbx1 expression indicates that dermomyotome induction occurs in Nog;Grem1 double mutants. Neither conditional Bmpr1a mutation nor treatment with the BMP type I receptor inhibitor dorsomorphin expands sclerotome marker expression, suggesting that BMP antagonists do not have an instructive function in sclerotome specification. Instead, we hypothesize that Nog- and Grem1-mediated inhibition of BMP is permissive for hedgehog (Hh) signal-mediated sclerotome specification. In support of this model, we found that culturing Nog;Grem1 double-mutant embryos with dorsomorphin restores sclerotome, whereas Pax1 expression in smoothened (Smo) mutants is not rescued, suggesting that inhibition of BMP is insufficient to induce sclerotome in the absence of Hh signaling. Confirming the dominant inhibitory effect of BMP signaling, Pax1 expression cannot be rescued in Nog;Grem1 double mutants by forced activation of Smo. We conclude that Nog and Grem1 cooperate to maintain a BMP signaling-free zone that is a crucial prerequisite for Hh-mediated sclerotome induction.