Spemann's organizer is a region of the gastrula stage embryo that contains future anterior endodermal and dorsal mesodermal tissues. During gastrulation, the dorsal mesoderm is divided into the prechordal mesoderm and the chordamesoderm. However, little is known regarding how this division is established. We analyzed the role of the anterior prechordal mesoderm-specific gene Xhairy2b in the regionalization of the organizer. We found that mesoderm-inducing transforming growth factor-β signaling induced Xhairy2b expression. On the other hand, the ectopic expression of Xhairy2b induced the expression of organizer-specific genes and resulted in the formation of a secondary dorsal axis lacking head and notochord structures. We also showed that Xhairy2b down-regulated the expression of ventral mesodermal, anterior endodermal, and chordamesodermal genes. In Xhairy2b-depleted embryos, defects in the specification of anterior prechordal mesoderm identity were observed as the border between the prechordal mesoderm and the chordamesoderm was anteriorly shifted. These results suggest that Xhairy2b establishes the identity of the anterior prechordal mesoderm within Spemann's organizer by inhibiting the formation of neighboring tissues. Developmental Dynamics 234:102–113, 2005. © 2005 Wiley-Liss, Inc.