Two populations of axial mesoderm cells can be recognised in the chick embryo, posterior notochord and anterior prechordal mesoderm. We have examined the cellular and molecular events that govern the specification of prechordal mesoderm. We report that notochord and prechordal mesoderm cells are intermingled and share expression of many markers as they initially extend out of Hensen's node. In vitro culture studies, together with in vivo grafting experiments, reveal that early extending axial mesoderm cells are labile and that their character may be defined subsequently through signals that derive from anterior endodermal tissues. Anterior endoderm elicits aspects of prechordal mesoderm identity in extending axial mesoderm by repressing notochord characteristics, briefly maintaining gsc expression and inducing BMP7 expression. Together these experiments suggest that, in vivo, signalling by anterior endoderm may determine the extent of prechordal mesoderm. The transforming growth factor (beta) (TGFbeta) superfamily members BMP2, BMP4, BMP7 and activin, all of which are transiently expressed in anterior endoderm mimic distinct aspects of its patterning actions. Together our results suggest that anterior endoderm-derived TGFbetas may specify prechordal mesoderm character in chick axial mesoderm.