Recent studies indicate an essential role for the EGF-CFC family in vertebrate development, particularly in the regulation of nodal signaling. Biochemical evidence suggests that EGF-CFC genes can also activate certain cellular responses independently of nodal signaling. Here, we show that FRL-1, a Xenopus EGF-CFC gene, suppresses BMP signaling to regulate an early step in neural induction. Overexpression of FRL-1 in animal caps induced the early neural markers zic3, soxD and Xngnr-1, but not the pan-mesodermal marker Xbra or the dorsal mesodermal marker chordin. Furthermore, overexpression of FRL-1 suppressed the expression of the BMP-responsive genes, Xvent-1 and Xmsx-1, which are expressed in animal caps and induced by overexpressed BMP-4. Conversely, loss of function analysis using morpholino-antisense oligonucleotides against FRL-1 (FRL-1MO) showed that FRL-1 is required for neural development. FRL-1MO-injected embryos lacked neural structures but contained mesodermal tissue. It was suggested previously that expression of early neural genes that mark the start of neuralization is activated in the presumptive neuroectoderm of gastrulae. FRL-1MO also inhibited the expression of these genes in dorsal ectoderm, but did not affect the expression of chordin, which acts as a neural inducer from dorsal mesoderm. FRL-1MO also inhibited the expression of neural markers that were induced by chordin in animal caps, suggesting that FRL-1 enables the response to neural inducing signals in ectoderm. Furthermore, we showed that the activation of mitogen-activated protein kinase by FRL-1 is required for neural induction and BMP inhibition. Together, these results suggest that FRL-1 is essential in the establishment of the neural induction response.