Genetic and embryological experiments have demonstrated an essential role for the visceral endoderm in the formation of the forebrain; however, the precise molecular and cellular mechanisms of this requirement are poorly understood. We have performed lineage tracing in combination with molecular marker studies to follow morphogenetic movements and cell fates before and during gastrulation in embryos mutant for the homeobox gene Otx2. Our results show, first, that Otx2 is not required for proliferation of the visceral endoderm, but is essential for anteriorly directed morphogenetic movement. Second, molecules that are normally expressed in the anterior visceral endoderm, such as Lefty1 and Mdkk1, are not expressed in Otx2 mutants. These secreted proteins have been reported to antagonise, respectively, the activities of Nodal and Wnt signals, which have a role in regulating primitive streak formation. The visceral endoderm defects of the Otx2 mutants are associated with abnormal expression of primitive streak markers in the epiblast, suggesting that anterior epiblast cells acquire primitive streak characteristics. Taken together, our data support a model whereby Otx2 functions in the anterior visceral endoderm to influence the ability of the adjacent epiblast cells to differentiate into anterior neurectoderm, indirectly, by preventing them from coming under the influence of posterior signals that regulate primitive streak formation.