Previously we have isolated a Xenopus cDNA homolog of bone morphogenetic protein-1 (XBMP-1A). In the present report we describe a new cDNA clone called XBMP-1B (or Xtld) from a Xenopus embryonic library. Sequence analysis indicates that these two clones share an indentical N-terminal sequence, including a region of metalloprotease domain, three copies of a repeat first found in complement proteins C1r/s and an epidermal growth factor (EGF)-like sequence. XBMP-1B protein has an additional copy of an EGF-like sequence followed by two copies of complement 1 r/s repeat in the C-terminus. The overall protein structure predicted from the XBMP-1B sequence reveals that it encodes a protein homologous to Drosophila tolloid. Three XBMP-1 transcripts (2.9, 5.2 and 6.6 kb) were detected by northern blot analysis. However, the 2.9 kb transcript hybridized specifically with XBMP-1A and the 5.2 and 6.6 kb transcripts hybridized with XBMP-1B. In Drosophila, a major function of tolloid is to augment the activity of the decapentaplegic gene product, a close relative of tumor growth factor (TGF)-beta superfamily members, BMP-2/4. Although XBMP-1 and XBMP-4 are detected in various adult tissues of Xenopus, the expression pattern of these two genes was not tightly correlated. In the embryo, the expression of XBMP-1 increased gradually from the morula to the swimming tadpole stages. Injection of XBMP-1B RNA into the ventral blastomeres at the 4-cell stage caused an elongation of the ventral marginal zone explants and converted globin-positive blood cells to mesenchymal and muscle tissues at later stages. It was shown that XBMP-1A was less active and a 1A mutant lacking the signal sequence was inactive. Further studies revealed that injection of XBMP-1B RNA into the ventral marginal zone induced up-regulation of dorsal marginal zone markers, such as goosecoid and chordin, at the gastrulation stage. These data indicate that XBMP-1 may have a role in determining dorso-ventral patterning in Xenopus, but in a different way from the dpp/tolloid system demonstrated in Drosophila.