The DAF-4 receptor kinase, which promotes larval development, is encoded by a 2.9 kb mRNA transcribed from the only type II TGF-beta/BMP receptor gene in Caenorhabditis elegans. Here we report that alternative polyadenylation in intron 5 of daf-4 results in a 2.0 kb mRNA that encodes an open reading frame including only the N-terminal secretion signal and ligand-binding domains, and not the transmembrane or kinase domains, of DAF-4. Northern blots and real-time RT-PCR amplifications using RNA samples from developmentally staged animals show that expression levels of both the 2.9 kb and 2.0 kb transcripts are relatively constant, and their abundances similar, except for the transition between non-dauer and dauer stages. In dauer larvae, the steady-state level of the 2.0 kb mRNA increases more than 10-fold and exceeds the 2.9 kb transcript, coincident with an absence of signaling from DAF-4. Transgenic expression of a recombinant daf-4 transgene that encodes only the 2.0 kb mRNA enhances the Daf-c phenotype of a daf-4 hypomorph, whereas the same transgene with a nonsense mutation does not. These data suggest that a polypeptide encoded by the 2.0 kb transcript can function as an antagonist of full-length DAF-4 signaling. Alternative processing of type II receptor transcripts to generate an antagonist is a novel mechanism for negative regulation of a TGF-beta signaling pathway.