In vertebrate embryos, maternal (beta)-catenin protein activates the expression of zygotic genes that establish the dorsal axial structures. Among the zygotically acting genes with key roles in the specification of dorsal axial structures are the homeobox gene bozozok (boz) and the nodal-related (TGF-(beta) family) gene squint (sqt). Both genes are expressed in the dorsal yolk syncytial layer, a source of dorsal mesoderm inducing signals, and mutational analysis has indicated that boz and sqt are required for dorsal mesoderm development. Here we examine the regulatory interactions among boz, sqt and a second nodal-related gene, cyclops (cyc). Three lines of evidence indicate that boz and sqt act in parallel to specify dorsal mesoderm and anterior neuroectoderm. First, boz requires sqt function to induce high levels of ectopic dorsal mesoderm, consistent with sqt acting either downstream or in parallel to boz. Second, sqt mRNA is expressed in blastula stage boz mutants, indicating that boz is not essential for activation of sqt transcription, and conversely, boz mRNA is expressed in blastula stage sqt mutants. Third, boz;sqt double mutants have a much more severe phenotype than boz and sqt single mutants. Double mutants consistently lack the anterior neural tube and axial mesoderm, and ventral fates are markedly expanded. Expression of chordin and noggin1 is greatly reduced in boz;sqt mutants, indicating that the boz and sqt pathways have overlapping roles in activating secreted BMP antagonists. In striking contrast to boz;sqt double mutants, anterior neural fates are specified in boz;sqt;cyc triple mutants. This indicates that cyc represses anterior neural development, and that boz and sqt counteract this repressive function. Our results support a model in which boz and sqt act in parallel to induce dorsalizing BMP-antagonists and to counteract the repressive function of cyc in neural patterning.