In ascidian embryos, anterior-posterior (A-P) patterning of the vegetal cells is regulated by posteriorizing activities of a localized egg region known as posterior-vegetal cortex/cytoplasm (PVC). PEM is an essential component of the PVC and is involved in the posterior-specific cell cleavage pattern. Here we report a novel function of PEM independently of its function in cleavage regulation; it controls cell fate by excluding competence to respond to the FGF signal for notochord induction from posterior-vegetal cells. PEM was found to regulate the nuclear accumulation of beta-catenin, an upstream activator of the competence factor. PEM also influences A-P patterning in the animal hemisphere. It was found to regulate FGF signal expression and restrict the occurrence of brain induction only in the anterior region. Our results suggest a model in which PEM patterns the embryo along the A-P axis through regulation of the spatial distribution of competence and induction ability.