Suppression of wing fate and specification of haltere fate in Drosophila by Ultrabithorax is a classical example of Hox regulation of serial homology. However, the mechanism of Ultrabithorax function in specifying haltere size and shape is not well understood. Here we show that Decapentaplegic signaling, which controls wing growth and shape, is a target of Ultrabithorax function during haltere specification. The Decapentaplegic signaling is down-regulated in haltere discs due to a combination of reduced levels of the Dpp, its trapping at the A/P boundary by increased levels of its receptor Thick-vein and its inability to diffuse in the absence of Dally. Results presented here suggest a complex mechanism adopted by Ultrabithorax to modulate Decapentaplegic signaling. We discuss how this complexity may regulate the final form of the adult haltere in the fly, without compromising features such as cell survival, which is also dependent on Decapentaplegic signaling.