We have studied the molecular basis of the Pax2 and Pax6 function in the establishment of visual system territories. Loss-of-function mutants have revealed crucial roles for Pax2 in the generation of the optic stalk and for Pax6 in the development of the optic cup. Ectopic expression of Pax6 in the optic stalk under control of Pax2 promoter elements resulted in a shift of the optic cup/optic stalk boundary indicated by the presence of retinal pigmented cells on the optic stalk. By studying mouse embryos at early developmental stages we detected an expansion of Pax2 expression domain in the Pax6(-/-) mutant and of Pax6 expression domain in the Pax2(-/-) embryo. These results suggest that the position of the optic cup/optic stalk boundary depends on Pax2 and Pax6 expression, hinting at a possible molecular interaction. Using gel shift experiments, we confirmed the presence of Pax2- and Pax6-binding sites on the retina enhancer of the Pax6 gene and on the Pax2 upstream control region, respectively. Co-transfection experiments revealed a reciprocal inhibition of Pax2 promoter/enhancer activity by Pax6 protein and vice versa. Based on our findings, we propose a model for Pax gene regulation that establishes the proper spatial regionalization of the mammalian visual system.