Lithium dorsalizes the body plan of Xenopus embryos when administered at the 32-cell stage (K.R. Kao and R.P. Elinson, 1988, Dev. Biol. 127, 64-77). In this paper, we have attempted to determine the effects of lithium on mesoderm induction, in order to localize the target of action of lithium. In the 32-cell embryo, the vegetal-most tier 4 cells are able to induce dorsal development in the overlying, equatorial tier 3 cells (R.L. Gimlich and J.C. Gerhart, 1984, Dev. Biol. 104, 117-130). Our experiments show that microinjection of lithium into either tier 3 or tier 4 cells of ultraviolet-irradiated, dorsoanterior-deficient embryos rescues normal development. Lineage tracer studies show that only tier 3-injected cells contribute progeny to dorsal axial structures while tier 4-injected cells contribute progeny to endoderm. Sandwich explants between animal caps and ventral vegetal cells cause induction of large amounts of muscle in the explants if either caps or vegetal cells are pretreated with lithium. Similarly, fibroblast growth factor-mediated mesoderm induction is also modified by lithium so that muscle is induced instead of ventral mesoderm. We conclude that lithium dorsalizes the response of animal cells to mesoderm induction signals, while not acting directly as a mesoderm inducer itself. The target of action of lithium is likely the third tier of cells of the 32-cell embryo.