We have studied the origin of muscle satellite cells in embryos of Xenopus laevis. Fate mapping at the open neural plate stage was carried out using orthotopic grafts from transgenic embryos expressing GFP. This shows that most satellite cells originate from the dorsolateral plate rather than from the paraxial mesoderm. Specification studies were made by isolation of explants from the paraxial and dorsolateral regions of neurulae and these also indicated that the satellite cell progenitors arise from the dorsolateral plate. Muscle satellite cells express Pax7, but overexpression of Pax7 in blastomeres of whole embryos that populate the myogenic areas does not induce the formation of additional satellite cells. Moreover, a dominant-negative construct, Pax7EnR, does not reduce satellite cell formation. Neither Pax7 nor other myogenic transcription factor genes will induce satellite cell formation in animal caps treated with FGF. However, BMP RNA or protein will do so, both for FGF-treated animal caps and for paraxial neurula explants. Conversely, the induction of Noggin in dorsolateral explants from HGEM-Noggin transgenic neurulae will block formation of satellite cells, showing that BMP signaling is required in vivo for satellite cell formation. We conclude that satellite cell progenitors are initially specified in the dorsal part of the lateral plate mesoderm and later become incorporated into the myotomes. The initial specification occurs at the neurula stage and depends on the ventral-to-dorsal BMP gradient in the early embryo.