Otx2 is expressed in each step and site of head development. To dissect each Otx2 function we have identified a series of Otx2 enhancers. The Otx2 expression in the anterior neuroectoderm is regulated by the AN enhancer and the subsequent expression in forebrain and midbrain later than E8.5 by FM1 and FM2 enhancers; the Otx1 expression takes place at E8.0. In telencephalon later than E9.5 Otx1 continues to be expressed in the entire pallium, while the Otx2 expression is confined to the most medial pallium. To determine the Otx functions in forebrain and midbrain development we have generated mouse mutants that lack both FM1 and FM2 enhancers (DKO: Otx2(ΔFM1ΔFM2/ΔFM1ΔFM2)) and examined the TKO (Otx1(-/-)Otx2(ΔFM1ΔFM2/ΔFM1ΔFM2)) phenotype. The mutants develop normally until E8.0, but subsequently by E9.5 the diencephalon, including thalamic eminence and prethalamus, and the mesencephalon are caudalized into metencephalon consisting of isthmus and rhombomere 1; the caudalization does not extend to rhombomere 2 and more caudal rhombomeres. In rostral forebrain, neopallium, ganglionic eminences and hypothalamus in front of prethalamus develop; we propose that they become insensitive to the caudalization with the switch from the Otx2 expression under the AN enhancer to that under FM1 and FM2 enhancers. In contrast, the medial pallium requires Otx1 and Otx2 for its development later than E9.5, and the Otx2 expression in diencepalon and mesencephalon later than E9.5 is also directed by an enhancer other than FM1 and FM2 enhancers.