Bone morphogenetic proteins (BMPs) are expressed broadly and regulate a diverse array of developmental events in vivo. Essential to many of these functions is the establishment of activity gradients of BMP, which provide positional information that influences cell fates. Secreted polypeptides, such as Noggin, bind BMPs and inhibit their function by preventing interaction with receptors on the cell surface. These BMP antagonists are assumed to be diffusible and therefore potentially important in the establishment of BMP activity gradients in vivo. Nothing is known, however, about the potential interactions between Noggin and components of the cell surface or extracellular matrix that might limit its diffusion. We have found that Noggin binds strongly to heparin in vitro, and to heparan sulfate proteoglycans on the surface of cultured cells. Noggin is detected only on the surface of cells that express heparan sulfate, can be specifically displaced from cells by heparin, and can be directly cross-linked to a cell surface proteoglycan in culture. Heparan sulfate-bound Noggin remains functional and can bind BMP4 at the plasma membrane. A Noggin mutant with a deletion in a putative heparin binding domain has reduced binding to heparin and does not bind to the cell surface but has preserved BMP binding and antagonist functions. Our results imply that interactions between Noggin and heparan sulfate proteoglycans in vivo regulate diffusion and therefore the formation of gradients of BMP activity.