Mouse nodal, a member of the TGFbeta family of secreted growth factors is essential for gastrulation. We recently generated a nodal(lacZ) reporter allele by homologous recombination in ES cells. In the present study, beta-galactosidase staining in the perigastrulation-stage embryo has demonstrated the site of highest nodal expression is localised to the prospective posterior region of the epiblast marking the site of primitive streak formation. We also documented transient nodal.lacZ expression in the visceral endoderm prior to and during early streak formation. A mosaic analysis using wild-type ES cells to rescue nodal-deficient embryos allowed us to document functionally distinct nodal activities in the embryonic ectodermal and primitive endodermal cell lineages. nodal signaling in the ectoderm is necessary for primitive streak formation as the gastrulation defect of nodal-deficient embryos can be rescued by the inclusion of small numbers of wild-type cells. In addition, we show that chimeric embryos composed of nodal-deficient primitive endoderm fail to develop rostral neural structures. Thus we conclude that the action of nodal, a TGFbeta-related growth factor expressed in the primitive endoderm, is critical for patterning of the anterior aspects of the A-P axis.