Bone morphogenetic proteins (BMPs), which have been implicated in the patterning of mesoderm, are members of the transforming growth factor-beta (TGF-beta) superfamily. We have investigated the roles of Xenopus BMP-7 (XBMP-7) and BMP-4 (XBMP-4), and activin (another TGF-beta-related molecule) in early development by generating dominant-negative versions of these growth factors. Mutations were generated by altering the cleavage sites that are required for maturation of the active dimeric forms of XBMP-7, XBMP-4, and activin. These mutant constructs, designated Cm-XBMP-7, Cm-XBMP-4, and Cm-activin, result in polypeptides that allow for dimerization of the subunits, but are incapable of maturation. Expression of Cm-XBMP-7 and Cm-XBMP-4, but not Cm-activin, in the ventral marginal zone of the Xenopus embryo results in the development of a secondary axis, similar to that seen by ectopic expression of the truncated BMP receptor. These results suggest that the cleavage mutants interfere with BMP signaling during mesodermal patterning. We also found that expression of Cm-XBMP-7 or Cm-XBMP-4 in animal cap ectoderm directly induces neuroectoderm. The neural induction was specific for Cm-XBMP-7 and Cm-XBMP-4 because ectopic expression of Cm-activin or Vg-1 did not mimic the same phenotype. Molecular study of neural patterning by Cm-XBMP-7 and Cm-XBMP-4 revealed that only anterior neuroectodermal markers are expressed in response to these Cm-XBMPs. These results suggest that the BMPs are involved in the specification of ectoderm in Xenopus development, and that neural induction requires the removal of BMP signals in the ectoderm. We propose that neural induction occurs by a default mechanism, whereby the inhibition of BMP signaling is required for the conversion of ectoderm to neuroectoderm in the developing Xenopus embryo.