Precise spatial and temporal control of Drosophila Bone Morphogenetic Protein (BMP) signaling is achieved by a host of extracellular factors that modulate ligand distribution and activity. Here we describe Kekkon5 (Kek5), a transmembrane protein containing leucine-rich repeats (LRRs), as a novel regulator of BMP signaling in Drosophila. We find that loss or gain of kek5 disrupts crossvein development and alters the early profile of phosphorylated Mad and dSRF in presumptive crossvein cells. kek5 phenotypic effects closely mimic those observed with Short gastrulation (Sog), but do not completely recapitulate the effects of dominant negative BMP receptors. We further demonstrate that Kek5 is able to antagonize the BMP ligand Glass bottom boat (Gbb) and that the Kek5 LRRs are required for BMP inhibitory activity, while the Ig domain is dispensable in this context. Our identification of Kek5 as a modulator of BMP signaling supports the emerging notion that LIG proteins function as diverse regulators of cellular communication.