Pattern formation in the developing embryo relies on key regulatory molecules, many of which are distributed in concentration gradients. For example, a gradient of BMP specifies cell fates along the dorsoventral axis in species ranging from flies to mammals. In Drosophila, a gradient of the BMP molecule Dpp gives rise to nested domains of target gene expression in the dorsal region of the embryo; however, the mechanisms underlying the differential response are not well understood, partly owing to an insufficient number of well-studied targets. Here we analyze how the Dpp gradient regulates expression of pannier (pnr), a candidate low-level Dpp target gene. We predicted that the pnr enhancer would contain high-affinity binding sites for the Dpp effector Smad transcription factors, which would be occupied in the presence of low-level Dpp. Unexpectedly, the affinity of Smad sites in the pnr enhancer was similar to those in the Race enhancer, a high-level Dpp target gene, suggesting that the affinity threshold mechanism plays a minimal role in the regulation of pnr. Our results indicate that a mechanism involving a conserved bipartite motif that is predicted to bind a homeodomain factor in addition to Smads and the Brinker repressor, establishes the pnr expression domain. Furthermore, the pnr enhancer has a highly complex structure that integrates cues not only from the dorsoventral axis, but also from the anteroposterior and terminal patterning systems in the blastoderm embryo.