Animal bodies are composed of structures that vary in size and shape within and between species. Selector genes generate these differences by altering the expression of effector genes whose identities are largely unknown. Prime candidates for such effector genes are components of morphogen signaling pathways, which control growth and patterning during development. Here we show that in Drosophila the Hox selector gene Ultrabithorax (Ubx) modulates morphogen signaling in the haltere through transcriptional regulation of the glypican dally. Ubx, in combination with the posterior selector gene engrailed (en), represses dally expression in the posterior (P) compartment of the haltere. Compared with the serially homologous wing, where Ubx is not expressed, low levels of posterior dally in the haltere contribute to a reduced P compartment size and an overall smaller appendage size. We also show that one molecular consequence of dally repression in the posterior haltere is to reduce Dpp diffusion into and through the P compartment. Our results suggest that Dpp mobility is biased towards cells with higher levels of Dally and that selector genes modulate organ development by regulating glypican levels.