This study first shows a striking parallel between the expression patterns of the Bmp4, Msx1 and Msx2 genes in the lateral ridges of the neural plate before neural tube closure and later on, in the dorsal neural tube and superficial midline ectoderm. We have previously shown that the spinous process of the vertebra is formed from Msx1- and 2-expressing mesenchyme and that the dorsal neural tube can induce the differentiation of subcutaneous cartilage from the somitic mesenchyme. We show here that mouse BMP4- or human BMP2-producing cells grafted dorsally to the neural tube at E2 or E3 increase considerably the amount of Msx-expressing mesenchymal cells which are normally recruited from the somite to form the spinous process of the vertebra. Later on, the dorsal part of the vertebra is enlarged, resulting in vertebral fusion and, in some cases (e.g. grafts made at E3), in the formation of a 'giant' spinous process-like structure dorsally. In strong contrast, BMP-producing cells grafted laterally to the neural tube at E2 exerted a negative effect on the expression of Pax1 and Pax3 genes in the somitic mesenchyme, which then turned on Msx genes. Moreover, sclerotomal cell growth and differentiation into cartilage were then inhibited. Dorsalization of the neural tube, manifested by expression of Msx and Pax3 genes in the basal plate contacting the BMP-producing cells, was also observed. In conclusion, this study demonstrates that differentiation of the ventrolateral and dorsal parts of the vertebral cartilage is controlled by different molecular mechanisms. The former develops under the influence of signals arising from the floor plate-notochord complex. These signals inhibit the development of dorsal subcutaneous cartilage forming the spinous process, which requires the influence of BMP4 to differentiate.