Limb amputation in the newt induces myofibers to dedifferentiate and re-enter the cell cycle to generate proliferative myogenic precursors in the regeneration blastema. Here we show that bone morphogenetic proteins (BMPs) and mature BMPs that have been further cleaved by serum proteases induce cell cycle entry by dedifferentiating newt muscle cells. Protease-activated BMP4/7 heterodimers that are present in serum strongly induced myotube cell cycle re-entry with protease cleavage yielding a 30-fold potency increase of BMP4/7 compared with canonical BMP4/7. Inhibition of BMP signaling via muscle-specific dominant-negative receptor expression reduced cell cycle entry in vitro and in vivo. In vivo inhibition of serine protease activity depressed cell cycle re-entry, which in turn was rescued by cleaved-mimic BMP. This work identifies a mechanism of BMP activation that generates blastema cells from differentiated muscle.