Dorsal dermis and epaxial muscle have been shown to arise from the central dermomyotome in the chick. En1 is a homeobox transcription factor gene expressed in the central dermomyotome. We show by genetic fate mapping in the mouse that En1-expressing cells of the central dermomyotome give rise to dorsal dermis and epaxial muscle and, unexpectedly, to interscapular brown fat. Thus, the En1-expressing central dermomyotome normally gives rise to three distinct fates in mice. Wnt signals are important in early stages of dermomyotome development, but the signal that acts to specify the dermal fate has not been identified. Using a reporter transgene for Wnt signal transduction, we show that the En1-expressing cells directly underneath the surface ectoderm transduce Wnt signals. When the essential Wnt transducer beta-catenin is mutated in En1 cells, it results in the loss of Dermo1-expressing dorsal dermal progenitors and dermis. Conversely, when beta-catenin was activated in En1 cells, it induces Dermo1 expression in all cells of the En1 domain and disrupts muscle gene expression. Our results indicate that the mouse central dermomyotome gives rise to dermis, muscle, and brown fat, and that Wnt signalling normally instructs cells to select the dorsal dermal fate.