Loss of function studies have shown that the Xenopus helix-loop-helix transcription factor Hairy2 is essential for neural crest formation and maintains cells in a mitotic undifferentiated state. However, its position in the genetic cascade regulating neural crest formation and its relationship with other neural crest regulators remain largely unknown. Here we find that Hairy2 is regulated by BMP, FGF and Wnt and that it is only required downstream of BMP and FGF for neural crest formation. We show that Hairy2 overexpression represses neural crest and upregulates neural border genes at early stages while it expands a subset of them in later embryos. We show that Hairy2 downregulates Id3, another essential HLH neural crest regulator, through attenuation of BMP signaling. Knockdown and rescue experiments indicate that Id3 protein, which physically interacts with Hairy2, negatively regulates Hairy2 activity. However, Id3 is required to allow Hairy2 to promote neural crest formation. Together, our results provide evidence that Hairy2 acts downstream of FGF and BMP signals at the neural border to maintain cells in an undifferentiated state, and that Hairy2-Id3 interactions play an essential role in neural crest progenitor specification.