The small GTPases of the Rac/Rho/Cdc42 subfamily are implicated in actin cytoskeleton-membrane interaction in mammalian cells and budding yeast. The in vivo functions of these GTPases in multicellular organisms are not known. We have cloned Drosophila homologs of rac and CDC42, Drac1, and Dcdc42. They share 70% amino acid sequence identity with each other, and both are highly expressed in the nervous system and mesoderm during neuronal and muscle differentiation, respectively. We expressed putative constitutively active and dominant-negative Drac1 proteins in these tissues. When expressed in neurons, Drac1 mutant proteins cause axon outgrowth defects in peripheral neurons without affecting dendrites. When expressed in muscle precursors, they cause complete failure of, or abnormality in, myoblast fusion. Expressions of analogous mutant Dcdc42 proteins cause qualitatively distinct morphological defects, suggesting that similar GTPases in the same subfamily have unique roles in morphogenesis.