Bone morphogenetic protein 4 (BMP4), a member of the TGF β superfamily, has been implicated in the dorsoventral specification of both mesoderm and ectoderm. High levels of BMP4 signaling appear to specify ventral lineages, while lower levels are causally associated with the development of dorsal lineages. We have previously identified a homeobox-containing transcription factor (PV. 1) which is a likely mediator of the ventralizing effects of BMP4 in the mesoderm. Here we provide evidence that PV.1 also functions downstream of BMP4 in the patterning of ectoderm, specifying epidermal and suppressing neural gene expression. PV. 1 is expressed in the prospective neuroectoderm at the time of ectodermal fate determination. BMP4 and xSmad1 (a downstream effector of BMP4) induce PV.1 in uncommitted ectoderm and the dominant negative form of the BMP4 receptor (DN-BR) blocks PV. 1 expression. In animal pole explants PV. 1 counteracts the neuralizing effects of chordin and the DN-BR and restores them to their original epidermal fate. To address the physiological significance of these observations we employed an animal cap transplantation system and demonstrated that overexpression of PV. 1 in the prospective neuroectoderm specifically blocks neurogenesis in intact embryos. Thus, PV. 1 plays an important role in the ventralization of both mesoderm and ectoderm. We have previously shown that PV. 1 is also preferentially expressed in the ventral endoderm, suggesting that this transcription factor may be involved in the ventralization of all three germ layers.