A common stem cell is known to produce both neural plate and mesoderm, but the factors regulating this choice are unknown. This study determines that Tbx6-dependent modulation of the developmental transcription factor Sox2 drives the fate of axial stem cells. In the absence of Tbx6, cells aberrantly upregulated Sox2 activity, with the result that cells originally destined to be mesoderm turned into ectopic neural tubes. In the absence of the N1 enhancer, this aberrant regulation is corrected and cells follow the appropriate fate, even in the absence of Tbx6. Therefore, active repression of the neural fate program is essential for mesoderm tissue to develop from axial stem cells.