A critical question in mammalian development is how the forebrain is established. In amphibians, bone morphogenetic protein (BMP) antagonism emanating from the gastrula organizer is key. Roles of BMP antagonism and the organizer in mammals remain unclear. Anterior visceral endoderm (AVE) promotes early mouse head development, but its function is controversial. Here, we explore the timing and regulation of forebrain establishment in the mouse. Forebrain specification requires tissue interaction through the late streak stage of gastrulation. Foxa2(-/-) embryos lack both the organizer and its BMP antagonists, yet about 25% show weak forebrain gene expression. A similar percentage shows ectopic AVE gene expression distally. The distal VE may thus be a source of forebrain promoting signals in these embryos. In wild-type ectoderm explants, AVE promoted forebrain specification, while anterior mesendoderm provided maintenance signals. Embryological and molecular data suggest that the AVE is a source of active BMP antagonism in vivo. In prespecification ectoderm explants, exogenous BMP antagonists triggered forebrain gene expression and inhibited posterior gene expression. Conversely, BMP inhibited forebrain gene expression, an effect that could be antagonized by anterior mesendoderm, and promoted expression of some posterior genes. These results lead to a model in which BMP antagonism supplied by exogenous tissues promotes forebrain establishment and maintenance in the murine ectoderm.