The anterior visceral endoderm (AVE) has attracted recent attention as a critical player in mouse forebrain development and has been proposed to act as "head organizer" in mammals. However, the precise role of the AVE in induction and patterning of the anterior neuroectoderm is not yet known. Here we identified a 5'-flanking region of the mouse Otx2 gene (VEcis) that governs the transgene expression in the visceral endoderm. In transgenic embryos, VEcis-active cells were found in the distal visceral endoderm at 5.5 days postcoitus (dpc), had begun to move anteriorly at 5.75 dpc, and then became restricted to the AVE prior to gastrulation. The VEcis-active visceral endoderm cells exhibited ectodermal morphology distinct from that of the other endoderm cells and consisted of two cell layers at 5.75 dpc. In the Otx2(-/-) background, the VEcis-active endoderm cells remained distal even at 6.5 dpc when a primitive streak was formed; anterior definitive endoderm was not formed nor were any markers of anterior neuroectoderm ever induced. The Otx2 cDNA transgene under the control of the VEcis restored these Otx2(-/-) defects, demonstrating that Otx2 is essential to the anterior movement of distal visceral endoderm cells. In germ-layer explant assays between ectoderm and visceral endoderm, the AVE did not induce anterior neuroectoderm markers, but instead suppressed posterior markers in the ectoderm; Otx2(-/-) visceral endoderm lacked this activity. Thus Otx2 is also essential for the AVE to repress the posterior character. These results suggest that distal visceral endoderm cells move to the future anterior side to generate a prospective forebrain territory indirectly, by preventing posteriorizing signals.