This document proposes a mechanism for signaling a PE router's tunnel encapsulation capabilities. One example is its capability to encapsulate MPLS using dynamic GRE and/or IP. This is applicable when a MPLS packet is tunneled using dynamic GRE and/or IP encapsulation [MPLS-IP-GRE] between PE routers. For instance the MPLS packet may be a 2547 based MPLS VPN packet [2547bis], a layer 2 packet transported using MPLS [MARTINI], a MPLS tunneled IPv6 packet or a MPLS IPv6 VPN packet [BGP-VPN-IPv6]. Adding such a mechanism has several benefits. It helps in blackhole avoidance and eases transitioning from MPLS tunneling based Layer 3/Layer 2 VPNs to GRE/IP tunneling based Layer 3/Layer 2 VPNs (and vice versa). Such a mechanism is needed where a network may be using MPLS and GRE (or IP) for tunneling, simultaneously in different parts of the network. It can help in encapsulation selection when multiple tunneling technologies are supported.