We previously showed that otx2 activates ectopic formation of the Xenopus cement gland only in ventrolateral ectoderm, defining a region of the embryo permissive for cement gland formation. In this paper, we explore the molecular identity of this permissive area. One candidate permissive factor is BMP4, whose putative graded inhibition by factors such as noggin has been proposed to activate both cement gland and neural fates. Several lines of evidence are presented to suggest that BMP signaling and otx2 work together to activate cement gland formation. First, BMP4 is highly expressed in the cement gland primordium together with otx2. Second, cement gland formation in isolated ectoderm is always accompanied by coexpression of otx2 and BMP4 RNA, whether cement gland is induced by otx2 or by the BMP protein inhibitor noggin. Third, BMP signaling can modulate otx2 activity, such that increasing BMP signaling preferentially inhibits neural induction by otx2, while decreasing BMP signaling prevents cement gland formation. In addition, we show that a hormone-inducible otx2 activates both ectopic neural and cement gland formation within the cement gland permissive region, in a pattern reminiscent of that found in the embryo. We discuss this observation in view of a model that BMP4 and otx2 work together to promote cement gland formation. (C) 2000 Elsevier Science Ireland Ltd.