The bone morphogenetic protein (BMP) signaling pathway is essential during gastrulation for the generation of ventral mesoderm, which makes it a challenge to define functions for this pathway at later stages of development. We have established an approach to disrupt BMP signaling specifically in lateral mesoderm during somitogenesis, by targeting a dominant-negative BMP receptor to Lmo2+ cells in developing zebrafish embryos. This results in expansion of hematopoietic and endothelial cells, while restricting the expression domain of the pronephric marker pax2.1. Expression of a constitutively active receptor and transplantation experiments were used to confirm that BMP signaling in lateral mesoderm restricts subsequent hemato-vascular development. The results show that the BMP signaling pathway continues to function after cells are committed to a lateral mesoderm fate, and influences subsequent lineage decisions by restricting hemato-vascular fate in favor of pronephric development.