During gastrulation in vertebrates, ectodermal cells choose between two fates, neural and epidermal. The nervous system forms in response to signals from the Spemann organizer; ectoderm that does not receive these signals becomes epidermis. Unexpectedly, however, in Xenopus, neural tissue also forms when cell-cell communication within the ectoderm is disrupted by cell dissociation or by antagonists of the growth factor activin. These observations suggest that epidermal specification depends on local signalling, by activin or a close relative, and that neural tissue forms when this communication is blocked. Here we report that bone morphogenesis protein 4 (Bmp-4), a relative of activin that is expressed in the embryo at the time of ectodermal fate determination, is a potent epidermal inducer and neural inhibitor, the first reported in any vertebrate. Activin can inhibit neuralization by inducing mesoderm, but does not induce epidermis. Moreover, the dominant-negative activin receptor, which stimulates neuralization when expressed in the embryo, blocks Bmp-4 in our assay. Our findings demonstrate that epidermal fate can be induced, and thus provide further evidence that neural specification is under inhibitory control in vertebrates.