Follistatin is known to antagonise the function of several members of the TGF-beta family of secreted signalling factors, including Myostatin, the most powerful inhibitor of muscle growth characterised to date. In this study, we compare the expression of Myostatin and Follistatin during chick development and show that they are expressed in the vicinity or in overlapping domains to suggest possible interaction during muscle development. We performed yeast and mammalian two-hybrid studies and show that Myostatin and Follistatin interact directly. We further show that single modules of the Follistatin protein cannot associate with Myostatin suggesting that the entire protein is required for the interaction. We analysed the interaction kinetics of the two proteins and found that Follistatin binds Myostatin with a high affinity of 5.84 x 10(-10) M. We next tested whether Follistatin suppresses Myostatin activity during muscle development. We confirmed our previous observation that treatment of chick limb buds with Myostatin results in a severe decrease in the expression of two key myogenic regulatory genes Pax-3 and MyoD. However, in the presence of Follistatin, the Myostatin-mediated inhibition of Pax-3 and MyoD expression is blocked. We additionally show that Myostatin inhibits terminal differentiation of muscle cells in high-density cell cultures of limb mesenchyme (micromass) and that Follistatin rescues muscle differentiation in a concentration-dependent manner. In summary, our data suggest that Follistatin antagonises Myostatin by direct protein interaction, which prevents Myostatin from executing its inhibitory effect on muscle development.