We have cloned a cDNA encoding a novel polypeptide capable of inducing dorsal development in Xenopus embryos. RNA transcripts from this clone rescue normal development when injected into ventralized embryos and result in excessive head development at high doses. Therefore, we have named the cDNA noggin, noggin cDNA contains a single reading frame encoding a 26 kd protein with a hydrophobic amino-terminal sequence, suggesting that it is secreted. In Northern blot analysis this cDNA hybridizes to two mRNAs that are expressed both maternally and zygotically. Although noggin transcript is not localized in the oocyte and cleavage stage embryo, zygotic transcripts are initially restricted to the presumptive dorsal mesoderm and reach their highest levels at the gastrula stage in the dorsal lip of the blastopore (Spemann organizer). In the neurula, noggin is transcribed in the notochord and prechordal mesoderm. The activity of exogenous noggin RNA in embryonic axis induction and the localized expression of endogenous noggin transcripts suggest that noggin plays a role in normal dorsal development.