The bone morphogenetic proteins (BMPs) are required for the development of ventral mesoderm, which contributes to the ventral blood island and primitive (yolk sac stage) hematopoiesis. Primitive erythropoiesis is defective when BMP signaling is blocked during gastrulation of Xenopus embryos. This phenotype might be attributed to changes in mesoderm patterning leading indirectly to altered erythropoiesis. We developed an inducible system in order to block BMP signaling in a controlled fashion at later time points in development. For this purpose, an inhibitory Smad, xSmad6, was fused to the estrogen receptor ligand-binding domain. We show that ER-xSmad6 is inactive when expressed in developing embryos, but its activity is induced by estradiol. When induced early in development, ER-xSmad6 causes a dorsalized phenotype, equivalent to overexpression of native xSmad6. When ER-xSmad6 is induced after gastrulation, there is a specific defect in primitive erythropoiesis without any apparent effect on axial patterning. Our results identify an embryonic signal that is Smad-dependent, is required for maintaining expression of GATA-1, and functions within mesoderm and not the overlying ectoderm. Thus, BMP signaling is necessary both during mesoderm patterning and also following early specification events for proper regulation of the primitive erythroid lineage.