The lateral border of the neural plate is a major source of signals that induce primary neurons, neural crest cells and cranial placodes as well as provide patterning cues to mesodermal structures such as somites and heart. Whereas secreted BMP, FGF and Wnt proteins influence the differentiation of neural and non-neural ectoderm, we show here that members of the Dlx family of transcription factors position the border between neural and non-neural ectoderm and are required for the specification of adjacent cell fates. Inhibition of endogenous Dlx activity in Xenopus embryos with an EnR-Dlx homeodomain fusion protein expands the neural plate into non-neural ectoderm tissue whereas ectopic activation of Dlx target genes inhibits neural plate differentiation. Importantly, the stereotypic pattern of border cell fates in the adjacent ectoderm is re-established only under conditions where the expanded neural plate abuts Dlx-positive non-neural ectoderm. Experiments in which presumptive neural plate was grafted to ventral ectoderm reiterate induction of neural crest and placodal lineages and also demonstrate that Dlx activity is required in non-neural ectoderm for the production of signals needed for induction of these cells. We propose that Dlx proteins regulate intercellular signaling across the interface between neural and non-neural ectoderm that is critical for inducing and patterning adjacent cell fates.