We investigate the occurrence of modulation instability in systems in which a dynamic Bragg grating consists of alternating positive and negative Kerr coefficients. The dependence of modulation instability gain spectra over the perturbation wavenumber and system parameters is portrayed near and at the edges of the photonic band gap structure. Further, we demonstrate the generation of traveling gap solitons near the photonic band gap structure through the modulation instability. © 2009 IOP Publishing Ltd.