Vertebrate body axis extension involves progressive generation and subsequent differentiation of new cells derived from a caudal stem zone; however, molecular mechanisms that preserve caudal progenitors and coordinate differentiation are poorly understood. FGF maintains caudal progenitors and its attenuation is required for neuronal and mesodermal differentiation and to position segment boundaries. Furthermore, somitic mesoderm promotes neuronal differentiation in part by downregulating Fgf8. Here we identify retinoic acid (RA) as this somitic signal and show that retinoid and FGF pathways have opposing actions. FGF is a general repressor of differentiation, including ventral neural patterning, while RA attenuates Fgf8 in neuroepithelium and paraxial mesoderm, where it controls somite boundary position. RA is further required for neuronal differentiation and expression of key ventral neural patterning genes. Our data demonstrate that FGF and RA pathways are mutually inhibitory and suggest that their opposing actions provide a global mechanism that controls differentiation during axis extension.