In neonatal mouse skin, two types of dermal papilla (DP) are distinguished by Sox2 expression: CD133+Sox2+ DP are associated with guard/awl/auchene hairs, whereas CD133+Sox2- DP are associated with zigzag (ZZ) hairs. We describe a three-dimensional hydrogel culture system that supports clonal growth of CD133+Sox2+, CD133+Sox2-, and CD133-Sox2- (non-DP) neonatal dermal cells. All three cell populations formed spheres that expressed the DP markers alkaline phosphatase, α8 integrin, and CD133. Nevertheless, spheres formed by CD133- cells did not efficiently support hair follicle formation in skin reconstitution assays. In the presence of freshly isolated P2 dermal cells, CD133+Sox2+ and CD133+Sox2- spheres contributed to the DP of both AA and ZZ hairs. Hair type did not correlate with sphere size. Sox2 expression was maintained in culture, but not induced significantly in Sox2- cells in vitro or in vivo, suggesting that Sox2+ cells are a distinct cellular lineage. Although Sox2+ cells were least efficient at forming spheres, they had the greatest ability to contribute to DP and non-DP dermis in reconstituted skin. As the culture system supports clonal growth of DP cells and maintenance of distinct DP cell types, it will be useful for further analysis of intrinsic and extrinsic signals controlling DP function.