During vulval development in the Caenorhabditis elegans hermaphrodite, the fates of six vulval precursor cells (VPCs) are influenced by distinct cell signaling events. In one event, a somatic gonadal cell, the anchor cell, induces the three nearest VPCs to adopt vulval cell fates. In another event, lateral signaling between adjacent VPCs specifies one of two different vulval fates, 1 degrees and 2 degrees. Induction of vulval fates by the anchor cell is mediated by a signal transduction pathway involving let-60 Ras, lin-45 Raf, and mpk-1/sur-1 MAP kinase, whereas lateral signaling is mediated by lin-12. We have shown that the mutant phenotype of lin-25, a gene required for VPC fate specification, results from a defect in vulval induction. Genetic epistasis experiments indicate that lin-25 is required in the inductive signaling pathway downstream of let-60 Ras and the Raf/MAP kinase cascade. A decrease in induction also appears to decrease lateral signaling. We have cloned and sequenced the lin-25 gene and shown that it encodes a novel protein that may be a target of the mpk-1/sur-1 MAPK.