Patterning along the anteroposterior (A-P) axis involves the interplay of secreted and transcription factors that specify cell fates in the mesoderm and neuroectoderm. While FGF and homeodomain proteins have been shown to play different roles in posterior specification, the network coordinating their effects remains elusive. Here we have analyzed the function of Gli zinc-finger proteins in mesodermal A-P patterning. We find that Gli2 is sufficient to induce ventroposterior development, functioning in the FGF-brachyury regulatory loop. Gli2 directly induces brachyury, a gene required and sufficient for mesodermal development, and Gli2 is in turn induced by FGF signaling. Moreover, the homeobox gene Xhox3, a critical determinant of posterior development, is also directly regulated by Gli2. Gli3, but not Gli1, has an activity similar to that of Gli2 and is expressed in ventroposterior mesoderm after Gli2. These findings uncover a novel function of Gli proteins, previously only known to mediate hedgehog signals, in the maintenance and patterning of the embryonic mesoderm. More generally, our results suggest a molecular basis for an integration of FGF and hedgehog inputs in Gli-expressing cells that respond to these signals.