Vg1 is a maternal mRNA localized to the vegetal hemisphere of Xenopus embryos during blastula stages, a region responsible for the induction of mesoderm in the adjacent marginal zone. Its homology to the transforming growth factor-beta family, which includes several proteins with mesoderm-inducing activity, suggests a role for Vg1 as an endogenous mesoderm-inducing factor. However, expression of Vg1 protein in the animal hemisphere, following injection of synthetic mRNA, has no effect on development, and isolated animal caps are not mesodermalized. It is shown that Vg1 protein fails to form dimers and is not processed to release the putative bioactive domain. Furthermore it is shown that the N-terminal signal peptide of Vg1 is not cleaved following translocation into the ER, which may explain the failure of this protein to dimerize. To explore the role of Vg1 in amphibian development, a fusion protein has been made of the preproregion of Xenopus bone morphogenetic protein-4 and the putative bioactive C-terminal domain of Vg1. This fusion protein forms dimers and the C-terminal domain of Vg1 is secreted. Injection of this construct into Xenopus embryos induces the formation of a second dorsal axis and isolated animal caps are mesodermalized. The results are consistent with a role for Vg1 in mesoderm induction during Xenopus development.