One of the earliest lineage restriction events in embryogenesis is the specification of the primary germ layers: ectoderm, mesoderm and endoderm. In Xenopus, germ layer specification occurs prior to gastrulation and requires the transcription factor VegT both for the cell-autonomous specification of endoderm and the generation of mesoderm-inducing signals. In the absence of VegT, ectoderm is formed in all regions of the embryo. In this work, we show that VegT-depleted vegetal cells (prospective endoderm) behave like animal cells in sorting assays and ectopically express early markers of ectoderm. To gain insight into how ectoderm is specified, we looked for candidate ectoderm-specific genes that are ectopically expressed in VegT-depleted embryos, and examined the role of one of these, the LIM homeobox gene Xlim5, in ectoderm development. We show that overexpression of Xlim5 in prospective endoderm cells is sufficient to impair sorting of animal cells from vegetal cells but is not sufficient (at similar doses) to induce ectoderm-specific genes. In whole embryos, Xlim5 causes vegetal cells to segregate inappropriately to other germ layers and express late differentiation markers of that germ layer. Inhibition of Xlim5 function using an Engrailed repressor construct or a morpholino oligonucleotide causes loss of animal cell adhesion or delay in neural fold morphogenesis, respectively, without significantly affecting early ectoderm gene expression. Taken together, our results provide evidence that a primary role for Xlim5 is to specifically regulate differential cell adhesion behaviour of the ectoderm.