Lateral organ polarity in Arabidopsis is regulated by antagonistic interactions between genes that promote either adaxial or abaxial identity, but the molecular basis of this interaction is largely unknown. We show that the adaxial regulator ASYMMETRIC LEAVES2 (AS2) is a direct target of the abaxial regulator KANADI1 (KAN1), and that KAN1 represses the transcription of AS2 in abaxial cells. Mutation of a single nucleotide in a KAN1 binding site in the AS2 promoter causes AS2 to be ectopically expressed in abaxial cells, resulting in a dominant, adaxialized phenotype. We also show that the abaxial expression of KAN1 is mediated directly or indirectly by AS2. These results demonstrate that KAN1 acts as a transcriptional repressor and that mutually repressive interactions between KAN1 and AS2 contribute to the establishment of adaxial-abaxial polarity in plants.