The secreted phospholipases A(2) (sPLA(2)s) comprise a family of small secreted proteins with the ability to catalyze the generation of bioactive lipids through glycophospholipid hydrolysis. Recently, a large number of receptor proteins and extracellular binding partners for the sPLA(2)s have been identified, suggesting that these secreted factors might exert a subset of their broad spectrum of biological activities independently of their enzymatic activity. Here, we describe an activity for the sPLA(2) group XII (sPLA(2)-gXII) gene during Xenopus laevis early development. In the ectoderm, sPLA(2)-gXII acts as a neural inducer by blocking bone morphogenetic protein (BMP) signaling. Gain of function in embryos leads to ectopic neurogenesis and to the specification of ectopic olfactory sensory structures, including olfactory bulb and sensory epithelia. This activity is conserved in the Drosophila melanogaster, Xenopus, and mammalian orthologs and appears to be independent of the lipid hydrolytic activity. Because of its effect on olfactory neurogenesis, we have renamed this gene Rossy, in homage to the Spanish actress Rossy de Palma. We present evidence that Rossy/sPLA(2)-gXII can inhibit the transcriptional activation of BMP direct-target gene reporters in Xenopus and mouse P19 embryonic carcinoma cells through the loss of DNA-binding activity of activated Smad1/4 complexes. Collectively, these data represent the first evidence for signaling cross talk between a secreted phospholipase A(2) and the BMP/transforming growth factor beta pathways and identify Rossy/sPLA(2)-gXII as the only factor thus far described which is sufficient to induce anterior sensory neural structures during vertebrate development.