The homeodomain and adjacent CVC domain in the visual system homeobox (VSX) proteins are conserved from nematodes to humans. Humans with missense mutations in these regions of VSX2 have microphthalmia, suggesting both regions are critical for function. To assess this, we generated the corresponding mutations in mouse Vsx2. The homeodomain mutant protein lacked DNA binding activity and the knock-in mutant phenocopied the null mutant, ocular retardation J. The CVC mutant protein exhibited weakened DNA binding; and, although the corresponding knock-in allele was recessive, it unexpectedly caused the strongest phenotype, as indicated by severe microphthalmia and hyperpigmentation of the neural retina. This occurred through a cryptic transcriptional feedback loop involving the transcription factors Mitf and Otx1 and the Cdk inhibitor p27(Kip1). Our data suggest that the phenotypic severity of the CVC mutant depends on the weakened DNA binding activity elicited by the CVC mutation and a previously unknown protein interaction between Vsx2 and its regulatory target Mitf. Our data also suggest that an essential function of the CVC domain is to assist the homeodomain in high-affinity DNA binding, which is required for eye organogenesis and unhindered execution of the retinal progenitor program in mammals. Finally, the genetic and phenotypic behaviors of the CVC mutation suggest it has the characteristics of a recessive neomorph, a rare type of genetic allele.