The nephric duct is the first epithelial tubule to differentiate from intermediate mesoderm that is essential for all further urogenital development. In this study we identify the domain of intermediate mesoderm that gives rise to the nephric duct and demonstrate that the surface ectoderm is required for its differentiation. Removal of the surface ectoderm resulted in decreased levels of Sim-1 and Pax-2 mRNA expression in mesenchymal nephric duct progenitors, and caused inhibition of nephric duct formation and subsequent kidney development. The surface ectoderm expresses BMP-4 and we show that it is required for the maintenance of high-level BMP-4 expression in lateral plate mesoderm. Addition of a BMP-4-coated bead to embryos lacking the surface ectoderm restored normal levels of Sim-1 and Pax-2 mRNA expression in nephric duct progenitors, nephric duct formation and the initiation of nephrogenesis. Thus, BMP-4 signaling can substitute for the surface ectoderm in supporting nephric duct morphogenesis. Collectively, these data suggest that inductive interactions between the surface ectoderm, lateral mesoderm and intermediate mesoderm are essential for nephric duct formation and the initiation of urogenital development.