Mesoderm induction during Xenopus development has been extensively studied, and two members of the transforming growth factor-beta family, activin beta B and Vg1, have emerged as candidates for a natural inducer of dorsal mesoderm. Heretofore, analysis of Vg1 activity has relied on injection of hybrid Vg1 mRNAs, which have not been shown to direct efficient secretion of ligand and, therefore, the mechanism of mesoderm induction by processed Vg1 protein is unclear. This report describes injection of Xenopus oocytes with a chimeric activin-Vg1 mRNA, encoding the pro-region of activin beta B fused to the mature region of Vg1, resulting in the processing and secretion of mature Vg1. Treatment of animal pole explants with mature Vg1 protein resulted in differentiation of dorsal, but not ventral, mesodermal tissues and dose-dependent activation of both dorsal and ventrolateral mesodermal markers. At high doses, mature Vg1 induced formation of 'embryoids' with a rudimentary axial pattern, head structures including eyes and a functional neuromuscular system. Furthermore, truncated forms of the activin and FGF receptors, which block mesoderm induction in the intact embryo, fully inhibited mature Vg1 activity. To examine the mechanism of inhibition, we have performed receptor-binding assays with radiolabeled Vg1. Finally, follistatin, a specific inhibitor of activin beta B which is shown not to block endogenous dorsal mesoderm induction, failed to inhibit Vg1. The results support a role for endogenous Vg1 in dorsal mesoderm induction during Xenopus development.