How growth factors influence the fate of multipotent progenitor cells is not well understood. Most hematopoietic growth factors act selectively as survival factors, rather than instructively as lineage determination signals. In the neural crest, neuregulin instructively promotes gliogenesis, but how alternative fates are determined is unclear. We demonstrate that bone morphogenic protein 2 (BMP2) induces the basic-helix-loop-helix protein MASH1 and neurogenesis in neural crest stem cells. In vivo, MASH1+ cells are located near sites of BMP2 mRNA expression. Some smooth muscle differentiation is also observed in BMP2. A related factor, transforming growth factor beta1 (TGFbeta1), exclusively promotes smooth muscle differentiation. Like neuregulin, BMP2 and TGFbeta1 act instructively rather than selectively. The neural crest and hematopoietic systems may therefore utilize growth factors in different ways to generate cellular diversity.