The cellular interactions that control the differentiation of dorsal cell types from neural progenitors have been examined in neural plate explants. Certain genes that are expressed in the dorsal neural tube are initially expressed uniformly within the neural plate and appear to achieve their dorsal restriction through a Sonic hedgehog (SHH)-mediated repressive signal from the notochord. The acquisition of definitive dorsal cell fates, however, requires a contact-dependent signal from the epidermal ectoderm. BMP4 and BMP7 are expressed in the epidermal ectoderm, and both proteins mimic its inductive activity. BMP4 and a related gene, DSL1, are subsequently expressed by cells in the dorsal neural tube. The differentiation of dorsal cell types, therefore, appears to be initiated at the neural plate stage and to involve the opponent activities of a BMP-mediated dorsalizing signal from the epidermal ectoderm and a SHH-mediated ventralizing signal from the notochord.