Induction and patterning of the mesodermal germ layer is a key early step of vertebrate embryogenesis. We report that FoxD3 function in the Xenopus gastrula is essential for dorsal mesodermal development and for Nodal expression in the Spemann organizer. In embryos and explants, FoxD3 induced mesodermal genes, convergent extension movements and differentiation of axial tissues. Engrailed-FoxD3, but not VP16-FoxD3, was identical to native FoxD3 in mesoderm-inducing activity, indicating that FoxD3 functions as a transcriptional repressor to induce mesoderm. Antagonism of FoxD3 with VP16-FoxD3 or morpholino-knockdown of FoxD3 protein resulted in a complete block to axis formation, a loss of mesodermal gene expression, and an absence of axial mesoderm, indicating that transcriptional repression by FoxD3 is required for mesodermal development. FoxD3 induced mesoderm in a non-cell-autonomous manner, indicating a role for secreted inducing factors in the response to FoxD3. Consistent with this mechanism, FoxD3 was necessary and sufficient for the expression of multiple Nodal-related genes, and inhibitors of Nodal signaling blocked mesoderm induction by FoxD3. Therefore, FoxD3 is required for Nodal expression in the Spemann organizer and this function is essential for dorsal mesoderm formation.