All skeletal muscle progenitor cells in the body derive from the dermomyotome, the dorsal epithelial domain of developing somites. These multipotent stem cells express Pax3, and this expression is maintained in the myogenic lineage where Pax3 plays an important role. Identification of Pax3 targets is therefore important for understanding the mechanisms that underlie the onset of myogenesis. In a microarray screen of Pax3-GFP sorted cells, with analysis on Pax3 gain and loss of function genetic backgrounds, we identify Dmrt2, expressed in the dermomyotome, as a Pax3 target. In vitro gel shift analysis and chromatin immunoprecipitation with in vivo extracts show that Pax3 binds to a conserved 286 bp sequence, situated at -18 kb from Dmrt2. This sequence directs reporter transgene expression to the somite, and this is severely affected when the Pax3 site is mutated in the context of the locus. In Dmrt2 mutant embryos, somite maturation is perturbed and the skeletal muscle of the myotome is abnormal. We now report that the onset of myogenesis is also affected. This depends on activation, in the epaxial dermomyotome, of the myogenic determination gene, Myf5, through its early epaxial enhancer. This sequence contains sites that bind Dmrt2, which belongs to the DM class of DNA-binding proteins. Mutation of these sites compromises activity of the enhancer in transgenic embryos where the reporter transgene is under the control of the Myf5 epaxial enhancer. Transactivation of this site by Dmrt2 is demonstrated in vitro, and conditional overexpression of Dmrt2 in Pax3 expressing cells in the somite confirms the role of this factor in the activation of Myf5. These results reveal a novel genetic network, comprising a Pax3/Dmrt2/Myf5 regulatory cascade that operates in stem cells of the epaxial dermomyotome to initiate skeletal muscle formation.