Abstract Background The mechanisms by which the conserved genetic “toolkit” for development generates phenotypic disparity across metazoans is poorly understood. Echinoderm larvae provide a great resource for understanding how developmental novelty arises. The sea urchin pluteus larva is dramatically different from basal echinoderm larval types, which include the auricularia-type larva of its sister taxon, the sea cucumbers, and the sea star bipinnaria larva. In particular, the pluteus has a mesodermally-derived larval skeleton that is not present in sea star larvae or any outgroup taxa. To understand the evolutionary origin of this structure, we examined the molecular development of mesoderm in the sea cucumber, Parastichopus parvimensis. Results By comparing gene expression in sea urchins, sea cucumbers and sea stars, we partially reconstructed the mesodermal regulatory state of the echinoderm ancestor. Surprisingly, we also identified expression of the transcription factor alx1 in a cryptic skeletogenic mesenchyme lineage in P. parvimensis. Orthologs of alx1 are expressed exclusively within the sea urchin skeletogenic mesenchyme, but are not expressed in the mesenchyme of the sea star, which suggests that alx1 + mesenchyme is a synapomorphy of at least sea urchins and sea cucumbers. Perturbation of Alx1 demonstrates that this protein is necessary for the formation of the sea cucumber spicule. Overexpression of the sea star alx1 ortholog in sea urchins is sufficient to induce additional skeleton, indicating that the Alx1 protein has not evolved a new function during the evolution of the larval skeleton. Conclusions The proposed echinoderm ancestral mesoderm state is highly conserved between the morphologically similar, but evolutionarily distant, auricularia and bipinnaria larvae. However, the auricularia, but not bipinnaria, also develops a simple skelotogenic cell lineage. Our data indicate that the first step in acquiring these novel cell fates was to re-specify the ancestral mesoderm into molecularly distinct territories. These new territories likely consisted of only a few cells with few regulatory differences from the ancestral state, thereby leaving the remaining mesoderm to retain its original function. The new territories were then free to take on a new fate. Partitioning of existing gene networks was a necessary pre-requisite to establish novelty in this system.