Morphogens are thought to establish pattern in early embryos by specifying several cell fates along a gradient of concentration; a well-studied example is the Drosophila protein decapentaplegic (DPP) acting in the wing disc. Recent work has established that bone morphogenetic protein 4 (BMP4), the vertebrate homologue of DPP, controls the fundamental choice between neural and epidermal fates in the vertebrate ectoderm, under the control of antagonists secreted by the organizer region of the mesoderm. We now show that BMP4 can act as a morphogen, evoking distinct responses in Xenopus ectodermal cells at high and low concentrations, in a pattern consistent with the positions of the corresponding cell types in the embryo. Moreover, this complex cellular response to extracellular BMP4 concentration does not require subsequent cell-cell communication and is thus direct, as required of a classical morphogen. We also show that the same series of cell types--epidermis, cement gland and neural tissue--can be produced by progressively inhibiting endogenous BMP signaling with specific antagonists, including the organizer factor noggin. Finally, expression of increasing doses of the signal transduction molecule Smad1 accurately reproduces the response to BMP4 protein. Since Smads have been shown to act in the nucleus, this finding implies a direct translation of extracellular morphogen concentration into transcription factor activity. We propose that a graded distribution of BMP activity controls the specification of several cell types in the gastrula ectoderm and that this extracellular gradient acts by establishing an intracellular and then nuclear gradient of Smad activity.