The processes that specify early regional identity in dorsal and lateral regions of the mammalian neural tube are not well understood. The mouse open brain (opb) gene plays an essential role in dorsal neural patterning: in the caudal spinal cord of opb mutants, dorsal cell types are absent and markers of ventral fates, including Shh, expand into dorsal regions. Analysis of the opb mutant phenotype and of opb/opb wild-type chimeric embryos reveals that early in neural development, the wild-type opb gene (opb(+)) is required cell autonomously for the expression of Pax7 in dorsal cells and Pax6 in lateral cells. Thus the opb(+) gene product acts intracellularly in the reception or interpretation of signals that determine cell types in the dorsal 80% of the neural tube. At later stages, the lack of opb(+) causes a non-cell-autonomous expansion of ventral cell types into dorsal regions of the neural tube, revealing that opb(+) controls the production of a diffusible molecule that defines the domain of Shh expression. The data indicate that opb(+) could act as either a novel component of a dorsalizing pathway or a novel intracellular negative regulator of the Shh signal transduction pathway.