We performed in vivo experiments in chick embryos that examined whether application of an exogenous source of Shh protein mimics the ability of the notochord to induce ectopic floor plate cells in the neural tube. Shh cannot act alone to induce a floor plate. However, coapplication of Shh and chordin, a BMP antagonist normally coexpressed with Shh in the notochord, results in a marked switch from dorsal to ventral cell fate, including a dramatic and widespread induction of floor plate cells. These data provide in vivo evidence that notochord-derived BMP antagonists may normally generate a permissive environment for the Shh-mediated induction of floor plate. Further experiments performed to address the source of BMPs that are inhibited by the action of chordin suggest that they derive specifically from the surface ectoderm and dorsal-most neuroepithelium. These data indicate that, at neural groove stages, dorsally derived BMPs affect ventral-most regions of the neural plate, suggesting a novel long-range action of BMPs. Together, these studies suggest that the balance of dorsally derived signals and notochord-derived signals determines the extent of floor plate cell induction.