Many of the interneuron cell types present in the adult spinal cord contribute to the circuits that control locomotion and posture. Little is known, however, about the embryonic origin of these cell types or the molecular mechanisms that control their differentiation. Here we provide evidence that V1 interneurons (INs), an embryonic class of interneurons that transiently express the En1 transcription factor, differentiate as local circuit inhibitory interneurons and form synapses with motor neurons. Furthermore, we show that a subset of V1 INs differentiates as Renshaw cells, the interneuronal cell type that mediates recurrent inhibition of motor neurons. We analyze the role that two V1 IN-related transcription factor genes play in Renshaw cell development. Pax6 (paired box gene 6) is necessary for an early step in Renshaw cell development, whereas Engrailed 1 (En1), which is genetically downstream of Pax6, regulates the formation of inhibitory synapses between Renshaw cells and motor neurons. Together, these results show that Pax6 and En1 have essential roles in establishing the recurrent inhibitory circuit between motor neurons and Renshaw cells.