The forkhead type Brain Factor 2 from mouse and chicken help pattern the forebrain, optic vesicle and kidney. We have isolated a Xenopus homolog (Xbf2) and found that during gastrulation it is expressed in the dorsolateral mesoderm, where it helps specify this territory by downregulating BMP-4 and its downstream genes. Indeed, Xbf2 overexpression caused partial axis duplication. Interference with BMP-4 signaling also occurs in isolated animal caps, since Xbf2 induces neural tissue. Within the neurula forebrain, Xbf2 and the related Xbf1 gene are expressed in the contiguous diencephalic and telencephalic territories, respectively, and each gene represses the other. Finally, Xbf2 seems to participate in the control of neural crest migration. Our data suggest that XBF2 interferes with BMP-4 signaling, both in mesoderm and ectoderm.