We have analyzed the role of mesoderm in the induction of the neural crest in Xenopus using expression of neural plate (Xsox-2) and neural crest (Xslug and ADAM). Conjugation experiments using different kinds of mesoderm together with embryonic dissection experiments suggest that the dorsolateral mesoderm is capable of specifically inducing neural crest cells. Neural crest markers can be induced in competent ectoderm at varying distances from the inducing mesoderm, with dorsal tissue inducing neural crest at a distance while dorsolateral tissue only induces neural crest directly in adjacent ectoderm. The results suggest that dorsal mesoderm has a high level of inducer and dorsolateral mesoderm has a lower level, consistent with a inductive gradient. We explored the possible role of BMP and noggin in the generation of such a hypothetical gradient and found that: (1) progressively higher levels of BMP activity are sufficient for the specification of neural plate, neural crest, and nonneural cells, respectively; (2) progressively higher levels of noggin are able to induce neural crest at greater distances from the source of inducer; and (3) modification of the levels of BMP activity causes induction of the neural crest in absence of neural plate, suggesting independent induction of these two tissues. We propose a model in which a gradient of BMP activity is established in the ectoderm by interaction between BMP in the ectoderm and BMP inhibitors in the mesoderm. Neural crest is induced when a threshold level of BMP is attained in the ectoderm. The dorsolateral mesoderm produces either BMP inhibitors or a specific neural crest inducer, with low BMP activity inducing neural plate while high BMP activity induces epidermis.