The msx homeodomain protein is a downstream transcription factor of the bone morphogenetic protein (BMP)-4 signal and a key regulator for neural tissue differentiation. Xmsx-1 antagonizes the dorsal expression of noggin and cerberus, as revealed by in situ hybridization and reverse transcription-polymerase chain reaction assays. In animal cap explants, Xmsx-1 and BMP-4 inhibit the neural tissue differentiation induced by noggin or cerberus. A loss-of-function study using the Xmsx-1/VP-16 fusion construct indicated that neural tissue formation was directly induced by the injection of fusion ribonucleic acid, although the expression of neural cell adhesion molecule (N-CAM) in the cap was less than that in the cap injected with tBR or noggin. In contrast to the single cap assay, unexpectedly, both BMP-4 and Xmsx-1 failed to inhibit neurulation in the ectodermal explants to which the organizer mesoderm was attached. The results of cell-lineage tracing experiments indicated that the neural cells were differentiated from the animal pole tissue where the excess RNA of either BMP-4 or Xmsx-1 was injected, whereas notochord was differentiated from the organizer mesoderm. Neural tissue differentiated from BMP-4-injected ectodermal cells strongly expressed posterior neural markers, such as hoxB9 and krox20, suggesting that the posterior neural cells differentiated regardless of the existence of the BMP signal. The introduction of a dominant-negative form of the fibroblast growth factor (FGF) receptor (XFD) into the ectodermal cells drastically reduced the expression of pan and posterior neural markers (N-CAM and hoxB-9) if co-injected with BMP-4 RNA, although XFD alone at the same dose did not shut down the expression of N-CAM in the combination explants. Therefore, it is proposed that an FGF-related molecule was involved in the direct induction of posterior neural tissue in the inducing signals from the organizer mesoderm in vivo.