Cranial neural crest cells (CNCCs) have the remarkable capacity to generate both the non-ectomesenchyme derivatives of the peripheral nervous system and the ectomesenchyme precursors of the vertebrate head skeleton, yet how these divergent lineages are specified is not well understood. Whereas studies in mouse have indicated that the Twist1 transcription factor is important for ectomesenchyme development, its role and regulation during CNCC lineage decisions have remained unclear. Here we show that two Twist1 genes play an essential role in promoting ectomesenchyme at the expense of non-ectomesenchyme gene expression in zebrafish. Twist1 does so by promoting Fgf signaling, as well as potentially directly activating fli1a expression through a conserved ectomesenchyme-specific enhancer. We also show that Id2a restricts Twist1 activity to the ectomesenchyme lineage, with Bmp activity preferentially inducing id2a expression in non-ectomesenchyme precursors. We therefore propose that the ventral migration of CNCCs away from a source of Bmps in the dorsal ectoderm promotes ectomesenchyme development by relieving Id2a-dependent repression of Twist1 function. Together our model shows how the integration of Bmp inhibition at its origin and Fgf activation along its migratory route would confer temporal and spatial specificity to the generation of ectomesenchyme from the neural crest.