Epiblast cells adjacent to the regressing primitive streak behave as a stem zone that progressively generates the entire spinal cord and also contributes to paraxial mesoderm. Despite this fundamental task, this cell population is poorly characterised, and the tissue interactions and signalling pathways that specify this unique region are unknown. Fibroblast growth factor (FGF) is implicated but it is unclear whether it is sufficient and/or directly required for stem zone specification. It is also not understood how establishment of the stem zone relates to the acquisition of spinal cord identity as indicated by expression of caudal Hox genes. Here, we show that many cells in the chick stem zone express both early neural and mesodermal genes; however, stem zone-specific gene expression can be induced by signals from underlying paraxial mesoderm without concomitant induction of an ambivalent neural/mesodermal cell state. The stem zone is a site of FGF/MAPK signalling and we show that although FGF alone does not mimic paraxial mesoderm signals, it is directly required in epiblast cells for stem zone specification and maintenance. We further demonstrate that caudal Hox gene expression in the stem zone also depends on FGF and that neither stem zone specification nor caudal Hox gene onset requires retinoid signalling. These findings thus support a two step model for spinal cord generation - FGF-dependent establishment of the stem zone in which progressively more caudal Hox genes are expressed, followed by the retinoid-dependent assignment of spinal cord identity.