Nodal functions in axis and tissue specification during embryogenesis. In sea urchin embryos, Nodal is crucial for specification of oral ectoderm and is thought to pattern neurogenesis in the animal plate. To determine if Nodal functions directly in suppressing neuron differentiation we have prepared mutant forms of Sp-Smad2/3. Expressing an activated form produces embryos similar to embryos overexpressing Nodal, but with fewer neurons. In chimeras in which Nodal is suppressed, cells expressing activated Sp-Smad2/3 form oral ectoderm, but not neurons. In embryos with vegetal signaling blocked, neurons do not form if activated Smad2/3 is co-expressed. Expression of dominant negative mutants produces embryos identical to those resulting from blocking Nodal expression. In chimeras overexpressing Nodal, cells expressing dominant negative Sp-Smad2/3 form aboral ectoderm and give rise to neurons. In permanent blastula chimeras dominant negative Sp-Smad2/3 is able to suppress the effects of Nodal permitting neuron differentiation. In these chimeras Nodal expression in one half suppresses neural differentiation across the interface. Anti-phospho-Smad3 reveals that the cells adjacent to cells expressing Nodal have nuclear immunoreactivity. We conclude Sp-Smad2/3 is a component of the Nodal signaling pathway in sea urchins and that Nodal diffuses short distances to suppress neural differentiation.