DCoH, the dimerization cofactor of the HNF-1 homeodomain proteins (hepatocyte nuclear factor-1alpha and beta), is involved in gene expression by associating with these transcription factors. The protein also called PCD for pterin-4alpha-carbinolamine dehydratase is a bifunctional factor as it catalyzes also the regeneration of tetrahydrobiopterin. This coenzyme is used by the enzyme phenylalanine hydroxylase, which generates tyrosine, the precursor of catecholamines and melanin. DCoH/PCD presumably cooperates with other partners, because it is expressed earlier than HNF1 and phenylalanine hydroxylase (PAH) in early vertebrate development. It is also found in cells lacking HNF1 and PAH like skin, brain and the pigmented epithelium of the eye suggesting a yet unknown function. We show that the overexpression of DCoH/PCD in Xenopus induces the formation of ectopic pigment cells in the epidermis, that are visible earlier than the endogenous pigmentation and broader distributed. This ectopic pigmentation is accompanied by an increase in tyrosinase activity and the amount of melanin. Overexpression of DCoH/PCD induces the appearance of pigment cells also in animal cap explants, that normally differentiate into atypical epidermis. DCoH/PCD mutants with impaired carbinolamine dehydratase activity retain the potential to induce pigmentation and we propose therefore that DCoH/PCD is not simply an essential enzyme for melanin biosynthesis, but also a regulator for the differentiation of pigment producing cells.