Early in differentiation, all neural cells have a rostral character. Only later do posteriorly positioned neural cells acquire characteristics of caudal forebrain, midbrain and hindbrain cells. Caudalization of neural tissue in the chick embryo apparently involves the convergent actions of (i) fibroblast growth factor (FGF) signaling and (ii) signaling from the caudal paraxial mesoderm, or 'PMC activity', which has not yet been defined molecularly. Here we report evidence that Wnt signaling underlies PMC activity, and show that Wnt signals act directly and in a graded manner on anterior neural cells to induce their progressive differentiation into caudal forebrain, midbrain and hindbrain cells.