Formation of the neural plate is an intricate process in early mammalian embryonic development mediated by cells of the inner cell mass and involving a series of steps, including development of the epiblast. Here, we report on the creation of an embryonic stem (ES) cell-based system to isolate and identify neural induction intermediates with characteristics of epiblast cells and neural plate. We demonstrate that neural commitment requires prior differentiation of ES cells into epiblast cells that are indistinguishable from those derived from natural embryos. We also demonstrate that epiblast cells can be isolated and cultured as epiblast stem cell lines. Fgf signaling is shown to be required for the differentiation of ES cells into these epiblast cells. Fgf2, widely used for maintenance of both human ES cells and epiblast stem cells, inhibits formation of early neural cells by epiblast intermediates in a dose-dependent manner and is sufficient to promote transient self-renewal of epiblast stem cells. In contrast, Fgf8, the endogenous embryonic neural inducer, fails to promote epiblast self-renewal, but rather promotes more homogenous neural induction with transient self-renewal of early neural cells. Removal of Fgf signaling entirely from epiblast cells promotes rapid neural induction and subsequent neurogenesis. We conclude that Fgf signaling plays different roles during the differentiation of ES cells, with an initial requirement in epiblast formation and a subsequent role in self-renewal. Fgf2 and Fgf8 thus stimulate self-renewal in different cell types.