Inner ear develops from an induced surface ectoderm placode that invaginates and closes to form the otic vesicle, which then undergoes a complex morphogenetic process to form the membranous labyrinth. Inner ear morphogenesis is severely affected in Gata3 deficient mouse embryos, but the onset and basis of the phenotype has not been known. We show here that Gata3 deficiency leads to severe and unique abnormalities during otic placode invagination. The invagination problems are accompanied often by the formation of a morphological boundary between the dorsal and ventral otic cup and by the precocious appearance of dorsal endolymphatic characteristics. In addition, the endolymphatic domain often detaches from the rest of the otic epithelium during epithelial closure. The expression of several cell adhesion mediating genes is altered in Gata3 deficient ears suggesting that Gata3 controls adhesion and morphogenetic movements in early otic epithelium. Inactivation of Gata3 leads also to a loss of Fgf10 expression in otic epithelium and auditory ganglion demonstrating that Gata3 is an important regulator of Fgf-signalling during otic development.