Proper central nervous system (CNS) function depends critically on the generation of functionally distinct neuronal types in specific and reproducible positions. The generation of neuronal diversity during CNS development involves a fine balance between dividing neural progenitors and the differentiated neuronal progeny that they produce. However, the molecular mechanisms that regulate these processes are still poorly understood. Here, we show that the Prox1 transcription factor, which is expressed transiently and specifically in spinal interneurons, plays an important role in neurogenesis. Using both gain- and loss-of-function approaches, we find that Prox1 is capable of driving neuronal precursors out of the cell cycle and can initiate limited expression of neuronal proteins. Using RNAi approaches, we show that Prox1 function is required to execute a neurogenic differentiation program downstream of Mash1 and Ngn2. Our studies demonstrate an important, spinal interneuron-specific role for Prox1 in controlling steps required for both cell-cycle withdrawal and differentiation.