Mechanisms of nerve net formation in Hydra were analyzed using a monoclonal antibody (L96) directed against neurons of the peduncle, the basal end of the polyp's body axis. L96+ neurons express RFamide neuropeptides and constitute 70-80% of all ectodermal neurons in the lower peduncle. L96+ neurons arise from neuronal precursors which immigrate from the gastric region into the upper peduncle and first differentiate into neurons lacking the L96 antigen. By tissue movement, these L96- neurons become displaced to the lower peduncle where L96 antigen expression is initiated. The entire L96 neuron differentiation pathway requires about 4 days, but regeneration stimuli shorten it to only 36 hr. Our experiments indicate that local extrinsic signals released by epithelial cells in the peduncle control the L96+ neuron differentiation pathway. Ectopic L96+ neuron differentiation can be induced by LiCl treatment, which also stimulates ectopic feet in the gastric region. Further experiments show that intrinsic signals are also involved in the L96+ neuron differentiation pathway. Neurons of the gastric region become continuously displaced to the peduncle by tissue movement, but these "old" neurons fail to express the L96 antigen in response to the altered epithelial environment. Gastric neurons also fail to express the L96 antigen after LiCl treatment or regeneration in stem cell-depleted polyps. Thus, the competence of neurons to respond to environmental cues with L96 antigen expression is strongly age-dependent. We define this age-dependent acquisition of the neuronal phenotype as phenotypic maturation controlled by the target tissue.