Sox proteins form a family of HMG-box transcription factors related to the mammalian testis determining factor SRY. Sox-mediated modulation of gene expression plays an important role in various developmental contexts. Drosophila SoxNeuro, a putative ortholog of the vertebrate Sox1, Sox2 and Sox3 proteins, is one of the earliest transcription factors to be expressed pan-neuroectodermally. We demonstrate that SoxNeuro is essential for the formation of the neural progenitor cells in central nervous system. We show that loss of function mutations of SoxNeuro are associated with a spatially restricted hypoplasia: neuroblast formation is severely affected in the lateral and intermediate regions of the central nervous system, whereas ventral neuroblast formation is almost normal. We present evidence that a requirement for SoxNeuro in ventral neuroblast formation is masked by a functional redundancy with Dichaete, a second Sox protein whose expression partially overlaps that of SoxNeuro. Genetic interactions of SoxNeuro and the dorsoventral patterning genes ventral nerve chord defective and intermediate neuroblasts defective underlie ventral and intermediate neuroblast formation. Finally, the expression of the Achaete-Scute gene complex suggests that SoxNeuro acts upstream and in parallel with the proneural genes.