During early embryogenesis, heart and skeletal muscle progenitor cells are thought to derive from distinct regions of the mesoderm (i.e. the lateral plate mesoderm and paraxial mesoderm, respectively). In the present study, we have employed both in vitro and in vivo experimental systems in the avian embryo to explore how mesoderm progenitors in the head differentiate into both heart and skeletal muscles. Using fate-mapping studies, gene expression analyses, and manipulation of signaling pathways in the chick embryo, we demonstrate that cells from the cranial paraxial mesoderm contribute to both myocardial and endocardial cell populations within the cardiac outflow tract. We further show that Bmp signaling affects the specification of mesoderm cells in the head: application of Bmp4, both in vitro and in vivo, induces cardiac differentiation in the cranial paraxial mesoderm and blocks the differentiation of skeletal muscle precursors in these cells. Our results demonstrate that cells within the cranial paraxial mesoderm play a vital role in cardiogenesis, as a new source of cardiac progenitors that populate the cardiac outflow tract in vivo. A deeper understanding of mesodermal lineage specification in the vertebrate head is expected to provide insights into the normal, as well as pathological, aspects of heart and craniofacial development.