The epithelium of the Spemann organizer plays an important role in embryonic axis formation and transplantation experiments have shown that epithelial organizer cells have potent axis-inducing potential. Known axis-inducing molecules like noggin and chordin are not expressed in the epithelium and cannot account for its inductive properties. Xwnt-11 is expressed in the epithelium but has only poor dorsalizing activity. In an expression screen for genes that are able to functionally cooperate with Xwnt-11 we have identified a cDNA encoding Xenopus nodal-related 3 (XNR3), a member of the TGF-beta family, coexpressed with Xwnt-11 in the organizer epithelium. Xwnt-11 and Xnr3 act highly cooperatively in inducing secondary embryonic axes and dorsalizing ventral mesoderm. Xwnt-11/Xnr3 interfere with BMP signalling without themselves inducing chordin or noggin. The results indicate that induction by the organizer epithelium may result from the combinatorial action of instructive Xnr3 and permissive Xwnt-11 signalling.