Necdin, a member of the MAGE (melanoma antigen) protein family, is expressed predominantly in terminally differentiated neurons. The necdin gene NDN is maternally imprinted and expressed only from the paternal allele, the deficiency of which is implicated in the pathogenesis of the neurodevelopmental disorder Prader-Willi syndrome. Necdin binds to its homologous MAGE protein MAGE-D1 (also known as NRAGE or Dlxin-1), which interacts with Msx (msh homeobox) and Dlx (distal-less homeobox) family homeodomain transcription factors. Members of the Dlx homeobox gene family are involved in the differentiation and specification of forebrain GABAergic neurons. Here we demonstrate that necdin associates with Dlx homeodomain proteins via MAGE-D1 to promote the differentiation of GABAergic neurons in mouse embryonic forebrain. Immunohistochemical analysis revealed that necdin was coexpressed with Dlx2, Dlx5, or MAGE-D1 in a subpopulation of embryonic forebrain cells. Necdin bound to Dlx2 and Dlx5 via MAGE-D1 and enhanced Dlx2-dependent activation of the Wnt1 (wingless-type MMTV integration site family) promoter. Necdin significantly increased the populations of cells expressing the GABAergic neuron markers calbindin D-28k and glutamic acid decarboxylase when overexpressed by electroporation in cultured forebrain slices. In this assay, Dlx5N, a truncated Dlx5 mutant that competes with Dlx2 to bind MAGE-D1, diminished the effect of necdin on GABAergic neuron differentiation. Furthermore, mutant mice lacking the paternal necdin allele showed a significant reduction in the differentiation of forebrain GABAergic neurons in vivo and in vitro. These results suggest that paternally expressed necdin facilitates the differentiation and specification of GABAergic neurons in cooperation with Dlx homeodomain proteins.