Cell-cell contact formation constitutes an essential step in evolution, leading to the differentiation of specialized cell types. However, remarkably little is known about whether and how the interplay between contact formation and fate specification affects development. Here, we identify a positive feedback loop between cell-cell contact duration, morphogen signaling, and mesendoderm cell-fate specification during zebrafish gastrulation. We show that long-lasting cell-cell contacts enhance the competence of prechordal plate (ppl) progenitor cells to respond to Nodal signaling, required for ppl cell-fate specification. We further show that Nodal signaling promotes ppl cell-cell contact duration, generating a positive feedback loop between ppl cell-cell contact duration and cell-fate specification. Finally, by combining mathematical modeling and experimentation, we show that this feedback determines whether anterior axial mesendoderm cells become ppl or, instead, turn into endoderm. Thus, the interdependent activities of cell-cell signaling and contact formation control fate diversification within the developing embryo.