In the accompanying paper, we show that the expression of a dominant negative activin receptor can convert prospective ectoderm into neural tissue, which suggests that activin is an inhibitor of neuralization. Here we report the isolation and characterization of an activin antagonist, follistatin, that can induce neural tissue directly in vivo. Follistatin RNA is localized in the Spemann organizer and notochord, tissues known to be potent neural inducers. We demonstrate that follistatin RNA and protein are able to block the activity of activin in embryonic explants. Furthermore, we show that follistatin RNA directly neuralizes ectodermal explants in the absence of detectable mesoderm. Thus, follistatin is present at the correct time and location to play a role in neural induction in vivo.