The transcription factor Pax6 is expressed in discrete domains in the developing brain, generally limited to progenitor populations. However, in the embryonic mouse diencephalon, Pax6 is not only expressed in neuroepithelial progenitors, but also at high levels in a specific set of initial neurons. These neurons first appeared on embryonic day 9.5 (E9.5) in the presumptive ventral thalamus and were fated to become A13 dopaminergic neurons of the medial zona incerta. To further characterize the initial differentiation of these neurons, and the function of Pax6 in their formation, the expression patterns of a number of transcription factors were described. The progenitor population was defined by reciprocal overlapping expression gradients of Pax6 and Nkx2.2, and a subset of proliferating progenitors were labeled with an antibody against DLX transcription factors. The initial neurons expressed combinations of transcription factors, including Pax6, DLX, and the LIM-domain proteins islet-1, Lhx1 (Lim1), and Lhx5 (Lim-2). Bromo-deoxyuridine (BrdU) labeling was used to follow the fate of a cohort of proliferating cells, defining a step-wise sequence of gene activation during differentiation. Pax6 up-regulation occurred only several hours postdifferentiation. The loss of Pax6 altered progenitor specification, and the Lhx1 neuronal marker was lost, indicating a role for Pax6 in the specification of forebrain neuron identity.