Multipotent skin stem cells give rise to epidermis and its appendages, including the hair follicle. The Lef-1/Tcf family of Wnt-regulated transcription factors plays a major role in specification of the hair shaft, but little is known about how the equally important hair channel, the inner root sheath (IRS), develops in concert to shape and guide the hair. In a microarray screen to search for transcriptional regulators of hair follicle morphogenesis, we identified GATA-3, a key regulator of T-cell lineage determination. Surprisingly, this transcription factor is essential for stem cell lineage determination in skin, where it is expressed at the onset of epidermal stratification and IRS specification in follicles.GATA-3-null/lacZknock-in embryos can survive up to embryonic day 18.5 (E18.5), when they fail to form the IRS. Skin grafting unveiled additional defects inGATA-3-null hairs and follicles. IRS progenitors failed to differentiate, whereas cortical progenitors differentiated, but produced an aberrant hair structure. Curiously, someGATA-3-null progenitor cells expressed mixed IRS and hair shaft markers. Taken together, these findings place GATA-3 with Lef-1/Wnts at the crossroads of the IRS versus hair shaft cell fate decision in hair follicle morphogenesis. This newfound function for GATA-3 in skin development strengthens the parallels between the differentiation programs governing hair follicle and lymphocyte differentiation.