Hypothalamic neurons play a key role in homeostasis, yet little is known about their differentiation. Here, we demonstrate that Shh and Bmp7 from the adjacent prechordal mesoderm govern hypothalamic neural fate, their sequential action controlling hypothalamic dopaminergic neuron generation in a Six3-dependent manner. Our data suggest a temporal distinction in the requirement for the two signals. Shh acts early to specify dopaminergic neurotransmitter phenotype. Subsequently, Bmp7 acts on cells that are ventralised by Shh, establishing aspects of hypothalamic regional identity in late-differentiating/postmitotic cells. The concerted actions of Shh and Bmp7 can direct mouse embryonic stem cell-derived neural progenitor cells to a hypothalamic dopaminergic fate ex vivo.