Forebrain cholinergic neurons play important roles as striatal local circuit neurons and basal telencephalic projection neurons. The genetic mechanisms that control development of these neurons suggest that most of them are derived from the basal telencephalon where Lhx8, a LIM-homeobox gene, is expressed. Here we report that mice with a null mutation of Lhx8 are deficient in the development of forebrain cholinergic neurons. Lhx8 mutants lack the nucleus basalis, a major source of the cholinergic input to the cerebral cortex. In addition, the number of cholinergic neurons is reduced in several other areas of the subcortical forebrain in Lhx8 mutants, including the caudate-putamen, medial septal nucleus, nucleus of the diagonal band, and magnocellular preoptic nucleus. Although cholinergic neurons are not formed, initial steps in their specification appear to be preserved, as indicated by a presence of cells expressing a truncated Lhx8 mRNA and mRNA of the homeobox gene Gbx1. These results provide genetic evidence supporting an important role for Lhx8 in development of cholinergic neurons in the forebrain.