In mammals, six separate sensory regions in the inner ear are essential for hearing and balance function. Each sensory region is made up of hair cells, which are the sensory cells, and their associated supporting cells, both arising from a common progenitor. Little is known about the molecular mechanisms that govern the development of these sensory organs. Notch signaling plays a pivotal role in the differentiation of hair cells and supporting cells by mediating lateral inhibition via the ligands Delta-like 1 and Jagged (JAG) 2. However, another Notch ligand, JAG1, is expressed early in the sensory patches prior to cell differentiation, indicating that there may be an earlier role for Notch signaling in sensory development in the ear. Here, using conditional gene targeting, we show that the Jag1 gene is required for the normal development of all six sensory organs within the inner ear. Cristae are completely lacking in Jag1-conditional knockout (cko) mutant inner ears, whereas the cochlea and utricle show partial sensory development. The saccular macula is present but malformed. Using SOX2 and p27kip1 as molecular markers of the prosensory domain, we show that JAG1 is initially expressed in all the prosensory regions of the ear, but becomes down-regulated in the nascent organ of Corti by embryonic day 14.5, when the cells exit the cell cycle and differentiate. We also show that both SOX2 and p27kip1 are down-regulated in Jag1-cko inner ears. Taken together, these data demonstrate that JAG1 is expressed early in the prosensory domains of both the cochlear and vestibular regions, and is required to maintain the normal expression levels of both SOX2 and p27kip1. These data demonstrate that JAG1-mediated Notch signaling is essential during early development for establishing the prosensory regions of the inner ear.