The developing vertebrate mesencephalon shows a rostrocaudal gradient in the expression of a number of molecular markers and in the cytoarchitectonic differentiation of the tectum, where cells cease proliferating and differentiate in a rostral to caudal progression. Tissue grafting experiments have implicated cell signalling by the mesencephalic-metencephalic (mid-hindbrain) junction (or isthmus) in orchestrating these events. We have explored the role of Wnt-1 and FGF8 signalling in the regulation of mesencephalic polarity. Wnt-1 is expressed in the caudal mesencephalon and Fgf8 in the most rostral metencephalon. Wnt-1 regulates Fgf8 expression in the adjacent metencephalon, most likely via a secondary mesencephalic signal. Ectopic expression of Fgf8 in the mesencephalon is sufficient to activate expression of Engrailed-2 (En-2) and ELF-1, two genes normally expressed in a decreasing caudal to rostral gradient in the posterior mesencephalon. Ectopic expression of Engrailed-1 (En-1), a functionally equivalent homologue of En-2 is sufficient to activate ELF-1 expression by itself. These results indicate the existence of a molecular hierarchy in which FGF8 signalling establishes the graded expression of En-2 within the tectum. This in turn may act to specify other aspects of A-P polarity such as graded ELF-1 expression. Our studies also reveal that FGF8 is a potent mitogen within the mesencephalon: when ectopically expressed, neural precursors continue to proliferate and neurogenesis is prevented. Taken together our results suggest that FGF8 signalling from the isthmus has a key role in coordinately regulating growth and polarity in the developing mesencephalon.