We have identified a dorsal-ventral difference in the specification of mesoderm in vivo by examining the effect of the dominant-negative FGF receptor on a new member of the Xenopus caudal gene family, Xcad-3. Xcad-3 is expressed throughout the marginal zone during the gastrula stages and serves as a useful marker for events occurring within the mesoderm. Disruption of the FGF signaling pathway by the dominant-negative FGF receptor, disrupts the Xcad-3 expression pattern, eliminating expression preferentially from the dorsal regions of the embryo. We also find that the expression of the Xenopus brachyury homolog, Xbra, is more readily eliminated from the dorsal than the ventral region of the embryo by the dominant-negative FGF receptor, indicating that the observed dorsal-ventral differences are not unique to Xcad-3. These results demonstrate the importance of regional effects on FGF-mediated induction in vivo and suggest that FGF-dependent expression of mesodermal genes depends upon the localization of other factors which establish dorsal-ventral differences within the embryo.