Normal patterning of tissues and organs requires the tight restriction of signaling molecules to well-defined organizing centers. In the limb bud, one of the main signaling centers is the zone of polarizing activity (ZPA) that controls growth and patterning through the production of sonic hedgehog (SHH). The appropriate temporal and spatial expression of Shh is crucial for normal limb bud patterning, because modifications, even if subtle, have important phenotypic consequences. However, although there is a lot of information about the factors that activate and maintain Shh expression, much less is known about the mechanisms that restrict its expression to the ZPA. In this study, we show that BMP activity negatively regulates Shh transcription and that a BMP-Shh negative-feedback loop serves to confine Shh expression. BMP-dependent downregulation of Shh is achieved by interfering with the FGF and Wnt signaling activities that maintain Shh expression. We also show that FGF induction of Shh requires protein synthesis and is mediated by the ERK1/2 MAPK transduction pathway. BMP gene expression in the posterior limb bud mesoderm is positively regulated by FGF signaling and finely regulated by an auto-regulatory loop. Our study emphasizes the intricacy of the crosstalk between the major signaling pathways in the posterior limb bud.