Signaling pathways are used reiteratively in different developmental processes yet produce distinct cell fates through activating specific downstream transcription factors. In this study, we used tooth root development as a model to investigate how the BMP signaling pathway regulates specific downstream transcriptional complexes to direct the fate determination of multipotent mesenchymal stem cells (MSCs). We first identified the MSC population supporting mouse molar root growth as Gli1+ cells. Using a Gli1-mediated transgenic animal model, our results provide the first in vivo evidence that BMP signaling activity is required for the odontogenic differentiation of MSCs. Specifically, we identified transcription factors that are downstream of BMP signaling and are expressed in a spatially restricted pattern consistent with their potential involvement in determining distinct cellular identities within the dental mesenchyme. Finally, we found that overactivation of one key transcription factor, Klf4, associated with the odontogenic region, promotes odontogenic differentiation of MSCs. Collectively, our results demonstrate the functional significance of BMP signaling in regulating the fate of MSCs during root development and shed light on how BMP signaling can achieve functional specificity in regulating diverse organ development.