The Drosophila ventral midline cells generate a discrete set of CNS lineages, required for proper patterning of the ventral ectoderm. Here we provide the first evidence that the CNS midline cells also exert inductive effects on the mesoderm. Mesodermal progenitors adjacent to the midline progenitor cells give rise to ventral somatic mucles and a pair of unique cells that come to lie dorsomedially on top of the ventral nerve cord, the so-called DM cells. Cell ablation as well as cell transplantation experiments indicate that formation of the DM cells is induced by midline progenitors in the early embryo. These results are corroborated by genetic analyses. Mutant single minded embryos lack the CNS midline as well as the DM cells. Embryos mutant for any of the spitz group genes, which primarily express defects in the midline glial cell lineages, show reduced formation of the DM cells. Conversely, directed overexpression of secreted SPITZ by some or all CNS midline cells leads to the formation of additional DM cells. Furthermore we show that DM cell development does not depend on the absolute concentration of a local inductor but appears to require a graded source of an inducing signal. Thus, the Drosophila CNS midline cells play a central inductive role in patterning the mesoderm as well as the underlying ectoderm.