Hair cells of the inner ear sensory organs originate from progenitor cells located at specific domains of the otic vesicle: the prosensory patches. Notch signalling is necessary for sensory development and loss of function of the Notch ligand jagged 1 (Jag1, also known as serrate 1) results in impaired sensory organs. However, the underlying mechanism of Notch function is unknown. Our results show that in the chicken otic vesicle, the Sox2 expression domain initially contains the nascent patches of Jag1 expression but, later on, Sox2 is only maintained in the Jag1-positive domains. Ectopic human JAG1 (hJag1) is able to induce Sox2 expression and enlarged sensory organs. The competence to respond to hJag1, however, is confined to the regions that expressed Sox2 early in development, suggesting that hJag1 maintains Sox2 expression rather than inducing it de novo. The effect is non-cell-autonomous and requires Notch signalling. hJag1 activates Notch, induces Hes/Hey genes and endogenous Jag1 in a non-cell-autonomous manner, which is consistent with lateral induction. The effects of hJag1 are mimicked by Jag2 but not by Dl1. Sox2 is sufficient to activate the Atoh1 enhancer and to ectopically induce sensory cell fate outside neurosensory-competent domains. We suggest that the prosensory function of Jag1 resides in its ability to generate discrete domains of Notch activity that maintain Sox2 expression within restricted areas of an extended neurosensory-competent domain. This provides a mechanism to couple patterning and cell fate specification during the development of sensory organs.