DURING gastrulation in vertebrates, ectodermal cells choose between two fates, neural and epidermal. The nervous system forms in response to signals from the Spemann organizer(1,2); ectoderm that does not receive these signals becomes epidermis. Unexpectedly, however, in Xenopus, neural tissue also forms when cell-cell communication within the ectoderm is disrupted by cell dissociation(3,4) or by antagonists of the growth factor activin(5-7). These observations suggest that epidermal specification depends on local signalling, by activin or a close relative, and that neural tissue forms when this communication is blocked(6). Here we report that bone morphogenesis protein 4 (Bmp-4), a relative of activin that is expressed in the embryo at the time of ectodermal fate determination(8,9), is a potent epidermal inducer and neural inhibitor, the first reported in any vertebrate. Activin can inhibit neuralization by inducing mesoderm, but does not induce epidermis. Moreover, the dominant-negative activin receptor, which stimulates neuralization when expressed in the embryo(5,6), blocks Bmp-4 in our assay. Our findings demonstrate that epidermal fate can be induced, and thus provide further evidence that neural specification is under inhibitory control in vertebrates.