In Drosophila embryos, founder cells that give rise to cardiac precursors and dorsal somatic muscles derive from dorsally located progenitors. Individual fates of founder cells are thought to be specified by combinatorial code of transcription factors encoded by identity genes. To date, a large number of identity genes have been identified; however, the mechanisms by which these genes contribute to cell fate specification remain largely unknown. We have analysed regulatory interactions of ladybird (lb), msh and even skipped (eve), the three identity genes specifying a subset of heart and/or dorsal muscle precursors. We show that deregulation of each of them alters the number of cells that express two other genes, thus changing the ratio between cardiac and muscular cells, and the ratio between different cell subsets within the heart and within the dorsal muscles. Specifically, we demonstrate that mutation of the muscle identity gene msh and misexpression of the heart identity gene lb lead to heart hyperplasia with similar cell fate modifications. In msh mutant embryos, the presumptive msh-muscle cells switch on lb or eve expression and are recruited to form supernumerary heart or dorsal muscle cells, thus indicating that msh functions as a repressor of lb and eve. Similarly, overexpression of lb represses endogenous msh and eve activity, hence leading to the respecification of msh and eve positive progenitors, resulting in the overproduction of a subset of heart cells. As deduced from heart and muscle phenotypes of numb mutant embryos, the cell fate modifications induced by gain-of-function of identity genes are not lineage restricted. Consistent with all these observations, we propose that the major role of identity genes is to maintain their restricted expression by repressing other identity genes competent to respond positively to extrinsic signals. The cross-repressive interactions of identity genes are likely to ensure their localised expression over time, thus providing an essential element in establishing cell identity.