The Xenopus egg has a yolk-laden vegetal hemisphere juxtaposed to a darkly pigmented animal hemisphere. Mesoderm is derived from the marginal zone, located at the interface between the two hemispheres. The vegetal-most cells become endoderm and release TGF-beta-related factors, including the Xenopus Nodal related (Xnr) proteins, which diffuse to induce the marginal zone to form mesoderm. The remaining animal cells become ectoderm, but our understanding of the mechanisms that limit the response to induction is incomplete. In this study, we provide evidence to suggest that Xrel3, a member of the Rel/NF-kappaB family, plays a role in defining the boundary separating induced from uninduced cells by regulating Xnr-responsive gene transcription. Ectopic Xrel3 expressed in prospective mesoderm caused repression of mesoderm-specific genes resulting in loss-of-function phenotypes that were rescued by co-expression of Xnr2. Depletion of Xrel3 from embryos with antisense morpholinos increased Xnr-dependent transcription, broadened expression of the pan-mesoderm marker Xbra and sensitized animal cells to mesoderm induction by Xnr2. We propose that an additional component to the mechanism that differentiates the ectoderm from the mesoderm involves regulation of nodal-dependent gene transcription by Xrel3.