Distinct cell types differentiate along the dorsoventral axis of the neural tube. We have cloned and characterized a novel member of the TGF beta gene family, dorsalin-1 (dsl-1), that appears to regulate cell differentiation within the neural tube. dsl-1 is expressed selectively in the dorsal neural tube, and its pattern of expression appears to be restricted by early signals from the notochord. Exposure of neural plate cells to dsl-1 promotes the differentiation of cells with neural crest-like properties and inhibits the induction of motor neurons by signals from the notochord and floor plate. These findings suggest that dsl-1 regulates the differentiation of cell types along the dorsoventral axis of the neural tube, acting in conjunction with distinct ventralizing signals from the notochord and floor plate.