In this study we show that cell fate decisions in the dorsal and lateral mesoderm of Drosophila melanogaster depend on the antagonistic action of the Gli-like transcription factor Lame duck (Lmd) and the zinc finger homeodomain factor Zfh1. Lmd expression leads to the reduction of Zfh1 positive cell types, thereby restricting the number of Odd-skipped (Odd) positive and Tinman (Tin) positive pericardial cells in the dorsal mesoderm. In more lateral regions, ectopic activation of Zfh1 or loss of Lmd leads to an excess of adult muscle precursor (AMP) like cells. We also observed that Lmd is co-expressed with Tin in the early dorsal mesoderm and leads to a reduction of Tin expression in cells destined to become dorsal fusion competent myoblasts (FCMs). In the absence of Lmd function, these cells remain Tin positive and develop as Tin positive pericardial cells although they do not express Zfh1. We show further that Tin repression and pericardial restriction in the dorsal mesoderm facilitated by Lmd is instructed by a late Decapentaplegic (Dpp) signal that is abolished in embryos carrying the disk region mutation dpp(d6).