Transforming growth factor-beta (TGF-beta) family members, which include bone morphogenetic proteins (BMPs) and TGF-betas, elicit their cellular effects by activating specific Smad proteins, which control the transcription of target genes. BMPs and TGF-betas have overlapping as well as specific effects on mesenchymal cell differentiation for which the mechanisms are incompletely understood. Here we report that Id1, a dominant negative inhibitor of basic helix-loop-helix proteins, is a direct target gene for BMP. BMP, but not TGF-beta, strongly activates the Id1 promoter in an Smad-dependent manner. We identified two BMP-responsive regions in the mouse Id1 promoter, which contain three distinct sequence elements; one region contains two Smad binding elements (SBEs), and the other region contains a GGCGCC palindromic sequence flanked by two CAGC and two CGCC motifs. Whereas SBEs and GGCGCC sequence are critically important, the CAGC and CGCC motifs are needed for efficient BMP-induced Id1 promoter activation. Smads are part of nuclear transcription factor complexes that specifically bind to SBEs and GGCGCC sequence in response to BMP but not TGF-beta. Multimerization of the all three distinct sequence motifs is needed to generate a highly sensitive and BMP/Smad-dependent specific enhancer. Our results provide important new insights into how the BMP/Smad pathway can specifically activate target genes.