Nodal-related members of the transforming growth factor (TGF)-beta family regulate the induction of mesoderm, endoderm, and mesendoderm, a tissue specific to the Spemann organizer. How these different tissues form in response to the same signalling molecules is not completely understood. It has been suggested that concentration-dependent effects, mediated by extracellular cofactors and antagonists, are responsible for the differences. Here we show that the nuclear protein Arkadia specifically potentiates the mesendoderm-inducing activity of a subset of TGF-beta family members. The combined activities of Arkadia and Xenopus nodal-related-1 are sufficient to induce mesendoderm and suppress mesoderm. Arkadia dorsalizes ventral tissues, resulting in the induction of organizer-specific gene expression. Blocking nodal signalling extracellularly inhibits these effects. Arkadia influences nodal activity when co-expressed and can function in cells adjacent to those producing the nodal signal. Our findings, together with the observation that Arkadia mutant mice lack a node and node-derived mesendoderm, identify Arkadia as an essential modulator of the nodal signalling cascade that leads to induction of Spemann's organizer.