The DNA-binding transcription factor Smad-interacting protein-1 (Sip1) (also named Zfhx1b/ZEB2) plays essential roles in vertebrate embryogenesis. In Xenopus, XSip1 is essential at the gastrula stage for neural tissue formation, but the precise molecular mechanisms that underlie this process have not been fully identified yet. Here we show that XSip1 functions as a transcriptional repressor during neural induction. We observed that constitutive activation of BMP signaling prevents neural induction by XSip1 but not the inhibition of several epidermal genes. We provide evidence that XSip1 binds directly to the BMP4 proximal promoter and modulates its activity. Finally, by deletion and mutational analysis, we show that XSip1 possesses multiple repression domains and that CtBPs contribute to its repression activity. Consistent with this, interference with XCtBP function reduced XSip1 neuralizing activity. These results suggest that Sip1 acts in neural tissue formation through direct repression of BMP4 but that BMP-independent mechanisms are involved as well. Our data also provide the first demonstration of the importance of CtBP binding in Sip1 transcriptional activity in vivo.