During embryogenesis, inductive interactions underlie the development of much of the body plan. In Xenopus laevis factors secreted from the vegetal pole induce mesoderm in the adjacent marginal zone; members of both the transforming growth factor-beta (TGF-beta) and fibroblast growth factor (FGF) ligand families seem to have critical roles in this process(1). Here we report the identification and characterization of laloo a novel participant in the signal transduction cascade linking extracellular, mesoderm-inducing signals to the nucleus, where alteration of cell fate is driven by changes in gene expression. Overexpression of laloo, a member of the Src-related gene family, in Xenopus embryos gives rise to ectopic posterior structures that frequently contain axial tissue. Laloo induces mesoderm in Xenopus ectodermal explants; this induction is blocked by reagents that disrupt the FGF signalling pathway. Conversely, expression of a dominant-inhibitory Laloo mutant blocks mesoderm induction by FGF and causes severe posterior truncations in vivo. This work provides the first evidence that a Src-related kinase is involved in vertebrate mesoderm induction.