During vertebrate eye development, the optic vesicle is partitioned into a domain at its distal tip that will give rise to the neuroretina, and another at its proximal base that will give rise to the pigmented epithelium. Both domains are initially bipotential, each capable of giving rise to either neuroretina or pigmented epithelium. The partitioning depends on extrinsic signals, notably fibroblast growth factors, which emanate from the overlying surface ectoderm and induce the adjacent neuroepithelium to assume the neuroretinal fate. Using explant cultures of mouse optic vesicles, we demonstrate that bipotentiality of the optic neuroepithelium is associated with the initial coexpression of the basic-helix-loop-helix-zipper transcription factor MITF, which is later needed solely in the pigmented epithelium, and a set of distinct transcription factors that become restricted to the neuroretina. Implantation of fibroblast growth factor-coated beads close to the base of the optic vesicle leads to a rapid downregulation of MITF and the development of an epithelium that, by morphology, gene expression, and lack of pigmentation, resembles the future neuroretina. Conversely, the removal of the surface ectoderm results in the maintenance of MITF in the distal optic epithelium, lack of expression of the neuroretinal-specific CHX10 transcription factor, and conversion of this epithelium into a pigmented monolayer. This phenomenon can be prevented by the application of fibroblast growth factor alone. In Mitf mutant embryos, parts of the future pigment epithelium become thickened, lose expression of a number of pigment epithelium transcription factors, gain expression of neuroretinal transcription factors, and eventually transdifferentiate into a laminated second retina. The results support the view that the bipotential optic neuroepithelium is characterized by overlapping gene expression patterns and that selective gene repression, brought about by local extrinsic signals, leads to the separation into discrete expression domains and, hence, to domain specification.