In vertebrates, BMPs are known to induce epidermal fate at the expense of neural fate. To further explore the molecular mechanisms of epidermal differentiation, we have developed an expression cloning system for isolating cDNAs that encode intrinsic proteins with epidermal-inducing activity. Under our conditions, 92.5% of the dissociated animal cap cells treated with the conditioned medium from H2O-injected control oocytes differentiated into neural tissue, which developed neural fibers and expressed a neural marker (NCAM). In contrast, when dissociated animal cap cells were treated with the supernatant collected from the culture of BMP-4 mRNA-injected oocytes, the microcultures differentiated into epidermal tissue, which developed cilium. The cells expressed an epidermal marker (keratin), but not NCAM. Using the dissociated animal cap cells in a functional screening system, we cloned a cDNA encoding a novel polypeptide, Xenopus zygote arrest 2 (Xzar2). Over-expression of Xzar2 caused anterior defects and suppressed expressions of the neural markers. The epidermalization-promoting activity of Xzar2 was substantially not affected by over-expression of the BMP signaling antagonists Smad6 and 7, and a dominant negative receptor for BMP (tBR). Our results suggest that Xzar2 is involved in epidermal fate determination mainly through signaling pathways distinct from that of BMP-Smad during early embryogenesis.