Drosophila has two pairs of Pax genes, ey/toy and eyg/toe, that play different functions during eye development. ey specifies eye fate, while eyg promotes cell proliferation. We have determined the molecular basis for the functional diversity of Eyg and Ey. Eyg and Ey act by distinct transcriptional mechanisms. They use different DNA-binding domains for target recognition. Most interestingly, Eyg acts exclusively as a repressor, whereas Ey is an activator. Several vertebrate Pax proteins are known to switch between activator and repressor activities, but none as repressors only. Eyg may be the first Pax protein as a dedicated repressor. Vertebrates produce a Pax6 isoform, Pax6-5a, differing from Pax6 in DNA-binding properties and functions and structurally similar to Eyg/Toe. We found that Pax6-5a acts as an activator like Ey, but has DNA-binding specificity like Eyg.