Somatic embryogenesis requires auxin and establishment of the shoot apical meristem (SAM). WUSCHEL (WUS) is critical for stem cell fate determination in the SAM of higher plants. However, regulation of WUS expression by auxin during somatic embryogenesis is poorly understood. Here, we show that expression of several regulatory genes important in zygotic embryogenesis were up-regulated during somatic embryogenesis of Arabidopsis. Interestingly, WUS expression was induced within the embryonic callus at a time when somatic embryos could not be identified morphologically or molecularly. Correct WUS expression, regulated by a defined critical level of exogenous auxin, is essential for somatic embryo induction. Furthermore, it was found that auxin gradients were established in specific regions that could then give rise to somatic embryos. The establishment of auxin gradients was correlated with the induced WUS expression. Moreover, the auxin gradients appear to activate PIN1 polar localization within the embryonic callus. Polarized PIN1 is probably responsible for the observed polar auxin transport and auxin accumulation in the SAM and somatic embryo. Suppression of WUS and PIN1 indicated that both genes are necessary for embryo induction through their regulation of downstream gene expression. Our results reveal that establishment of auxin gradients and PIN1-mediated polar auxin transport are essential for WUS induction and somatic embryogenesis. This study sheds new light on how auxin regulates stem cell formation during somatic embryogenesis.