In the present study we report that basic fibroblast growth factor (bFGF, FGF-2) promotes the transdifferentiation of Xenopus laevis larval retinal pigment epithelium (RPE) into neural retina. Using specific antibodies we have examined the cellular composition of the regenerated retinal tissue. Our results show that, in addition to retinal neurons and photoreceptors, glial cells were also regenerated from the transdifferentiated RPE. These results were specific to FGF-2, since other factors that were tested, including acidic FGF (aFGF, FGF-1), epidermal growth factor (EGF), laminin, ECL, and Matrigel, exhibited no activity in inducing retinal regeneration. These results are the first in amphibians demonstrating the functional role of FGF-2 in inducing RPE transdifferentiation. Transplantation studies were carried out to investigate retinal regeneration from the RPE in an in vivo environment. Sheets of RPE implanted into the lens-less eyes of larval hosts transformed into neurons and glial cells only when under the influence of host retinal factors. In contrast, no retinal transdifferentiation occurred if the RPE was implanted into the enucleated orbit. Taken together, these results show that the amphibian RPE is capable of transdifferentiation into neuronal and glial cell-phenotypes and implicate FGF-2 as an important factor in inducing retinal regeneration in vitro.