Neural patterning of the vertebrate brain starts within the ectoderm during gastrulation and requires the activity of organizer cell populations in the neurectoderm. One such organizer is located at the prospective midbrain-hindbrain boundary (MHB) and controls development of the midbrain and the anterior hindbrain via the secreted signaling molecule Fgf8. However, little is known about how the ability of neural precursors to respond to Fgf8 is regulated. We have studied the function of the zebrafish spiel-ohne-grenzen (spg) gene in early neural development. Genetic mapping and molecular characterization presented in the accompanying paper revealed that spg mutations disrupt the pou2 gene, which encodes a POU domain transcription factor that is specifically expressed in the MHB primordium, and is orthologous to mammalian Oct3/Oct4. We show that embryos homozygous for spg/pou2 have severe defects in development of the midbrain and hindbrain primordium. Key molecules that function in the formation of the MHB, such as pax2.1, spry4, wnt1, her5, eng2 and eng3, and in hindbrain development, such as krox20, gbx2, fkd3 and pou2, are all abnormal in spg mutant embryos. By contrast, regional definition of the future MHB in the neuroectoderm by complementary expression of otx2 and gbx1, before the establishment of the complex regulatory cascade at the MHB, is normal in spg embryos. Moreover, the Fgf8 and Wnt1 signaling pathways are activated normally at the MHB but become dependent on spg towards the end of gastrulation. Therefore, spg plays a crucial role both in establishing and in maintaining development of the MHB primordium. Transplantation chimeras show that normal spg function is required within the neuroectoderm but not the endomesoderm. Importantly, gain-of-function experiments by mRNA injection of fgf8 and pou2 or Fgf8 bead implantations, as well as analysis of spg-ace double mutants show that spg embryos are insensitive to Fgf8, although Fgf receptor expression and activity of the downstream MAP kinase signaling pathway appear intact. We suggest that spg/pou2 is a transcription factor that mediates regional competence to respond to Fgf8 signaling.