Asymmetric cell divisions produce two sibling cells with distinct fates, providing an important means of generating cell diversity in developing embryos. Many examples of such cell divisions have been described, but so far only a limited number of the underlying mechanisms have been elucidated. Here, we have uncovered a novel mechanism controlling an asymmetric cell division in the ascidian embryo. This division produces one notochord and one neural precursor. Differential activation of extracellular-signal-regulated kinase (ERK) between the sibling cells determines their distinct fates, with ERK activation promoting notochord fate. We first demonstrate that the segregation of notochord and neural fates is an autonomous property of the mother cell and that the mother cell acquires this functional polarity via interactions with neighbouring ectoderm precursors. We show that these cellular interactions are mediated by the ephrin-Eph signalling system, previously implicated in controlling cell movement and adhesion. Disruption of contacts with the signalling cells or inhibition of the ephrin-Eph signal results in the symmetric division of the mother cell, generating two notochord precursors. Finally, we demonstrate that the ephrin-Eph signal acts via attenuation of ERK activation in the neural-fated daughter cell. We propose a model whereby directional ephrin-Eph signals functionally polarise the notochord/neural mother cell, leading to asymmetric modulation of the FGF-Ras-ERK pathway between the daughter cells and, thus, to their differential fate specification.