lag-2 encodes a ligand for LIN-12/Notch and is a component of the lateral signal that activates LIN-12/Notch during Caenorhabditis elegans vulval precursor cell (VPC) fate patterning. lag-2 is specifically transcribed in one VPC, named P6.p, in response to activation of EGFR/Ras/MAPK by the inductive signal that initiates vulval development. Here, we show that a critical molecular event linking inductive and lateral signaling is the relief of VPC-wide lag-2 repression in P6.p. We find that the lag-2 promoter contains an element, VPCrep, which mediates repression in all VPCs when the inductive signal is absent, and another promoter element, VPCact, which is required for activation when repression is relieved by the inductive signal. We show that repression through VPCrep is mediated by the Elk1 ortholog LIN-1, and that the level and subcellular accumulation of a functional LIN-1::GFP protein is similar in all six VPCs before and after vulval induction, suggesting that relief of LIN-1-mediated repression in P6.p is likely due to the known MAPK-dependent phosphorylation of LIN-1. We also provide evidence that the factor(s) acting through VPCact is present in all VPCs but is not modulated by the inductive signal, and that transcription of lag-2 requires the Hth/Meis ortholog UNC-62 and the Mediator complex component SUR-2. Relief of repression of lag-2 in P6.p offers a plausible mechanistic basis for spatial restriction of lag-2 in generating the precise spatial pattern of VPC fates.