Mesodermal signaling is critical for patterning the embryonic endoderm into different tissue domains. Classical tissue transplant experiments in the chick and recent studies in the mouse indicated that interactions with the cardiogenic mesoderm are necessary and sufficient to induce the liver in the ventral foregut endoderm. Using molecular markers and functional assays, we now show that septum transversum mesenchyme cells, a distinct mesoderm cell type, are closely apposed to the ventral endoderm and contribute to hepatic induction. Specifically, using a mouse Bmp4 null mutation and an inhibitor of BMPs, we find that BMP signaling from the septum transversum mesenchyme is necessary to induce liver genes in the endoderm and to exclude a pancreatic fate. BMPs apparently function, in part, by affecting the levels of the GATA4 transcription factor, and work in parallel to FGF signaling from the cardiac mesoderm. BMP signaling also appears critical for morphogenetic growth of the hepatic endoderm into a liver bud. Thus, the endodermal domain for the liver is specified by simultaneous signaling from distinct mesodermal sources.