Myostatin, a TGF-beta family member, is an important regulator of adult muscle size. While extensively studied in vitro, the mechanisms by which this molecule mediates its effect in vivo are poorly understood. We addressed this question using chick and mouse embryos. We show that while myostatin overexpression in chick leads to an exhaustion of the muscle progenitor population that ultimately results in muscle hypotrophy, myostatin loss of function in chick and mouse provokes an expansion of this population. Our data demonstrate that myostatin acts in vivo to regulate the balance between proliferation and differentiation of embryonic muscle progenitors by promoting their terminal differentiation through the activation of p21 and MyoD. Previous studies have suggested that myostatin imposes quiescence on muscle progenitors. Our data suggest that myostatin's effect on muscle progenitors is more complex than previously realized and is likely to be context-dependent. We propose a novel model for myostatin mode of action in vivo, in which myostatin affects the balance between proliferation and differentiation of embryonic muscle progenitors by enhancing their differentiation.