Construction of the trunk/caudal region of the vertebrate embryo involves a set of distinct molecules and processes whose relationships are just coming into focus. In addition to the subdivision of the embryo into head and trunk domains, this "caudalisation" process requires the establishment and maintenance of a stem zone. This sequentially generates caudal tissues over a long period which then undergo differentiation and patterning in the extending body axis. Here we review recent studies that show that changes in the signalling properties of the paraxial mesoderm act as a switch that controls onset of differentiation and pattern in the spinal cord. These findings identify distinct roles for different caudalising factors; in particular, Fibroblast Growth Factor (FGF) inhibits differentiation in the caudal stem zone, while Retinoic acid (RA) provided rostrally by somitic mesoderm is required for neuronal differentiation and establishment of ventral neural pattern. Furthermore, the mutual opposition of FGF and RA pathways controls not only neural differentiation but also mesoderm segmentation and might also underlie the progressive assignment of rostrocaudal identity by regulating Hox gene availability and activation.