Mouse embryos homozygous for a null mutation in nodal arrest development at early gastrulation and contain little or no embryonic mesoderm. Here, two Xenopus nodal-related genes (Xnr-1 and Xnr-2) are identified and shown to be expressed transiently during embryogenesis, first within the vegetal region of late blastulae and later in the marginal zone during gastrulation, with enrichment in the dorsal lip. Xnrs and mouse nodal function as dose-dependent dorsoanterior and ventral mesoderm inducers in whole embryos and explanted animal caps. Using a plasmid vector to produce Xnr proteins during gastrulation, we show that, in contrast to activin and other TGF beta-like molecules, Xnr-1 and Xnr-2 can dorsalize ventral marginal zone explants and induce muscle differentiation. Xnr signalling also rescues a complete embryonic axis in UV-ventralized embryos. The patterns of Xnr expression, the activities of the proteins and the phenotype of mouse nodal mutants, all argue strongly that a signaling pathway involving nodal, or nodal-related peptides, is an essential conserved element in mesoderm differentiation associated with vertebrate gastrulation and axial patterning.