Central nervous system injury induces a regenerative response in ensheathing glial cells comprising cell proliferation, spontaneous axonal remyelination, and limited functional recovery, but the molecular mechanisms are not fully understood. In Drosophila, this involves the genes prospero and Notch controlling the balance between glial proliferation and differentiation, and manipulating their levels in glia can switch the response to injury from prevention to promotion of repair. In the mouse, Notch1 maintains NG2 oligodendrocyte progenitor cells (OPCs) in a progenitor state, but what factor may enable oligodendrocyte (OL) differentiation and functional remyelination is not understood. Here, we asked whether the mammalian homologue of prospero, Prox1, is involved. Our data show that Prox1 is distributed in NG2+ OPCs and in OLs in primary cultured cells, and in the mouse spinal cord in vivo. siRNA prox1 knockdown in primary OPCs increased cell proliferation, increased NG2+ OPC cell number and decreased CC1+ OL number. Prox1 conditional knockout in the OL cell lineage in mice increased NG2+ OPC cell number, and decreased CC1+ OL number. Lysolecithin-induced demyelination injury caused a reduction in CC1+ OLs in homozygous Prox1-/- conditional knockout mice compared to controls. Remarkably, Prox1-/- conditional knockout mice had smaller lesions than controls. Altogether, these data show that Prox1 is required to inhibit OPC proliferation and for OL differentiation, and could be a relevant component of the regenerative glial response. Therapeutic uses of glia and stem cells to promote regeneration and repair after central nervous system injury would benefit from manipulating Prox1.