While microRNAs have emerged as an important component of gene regulatory networks, it remains unclear how microRNAs collaborate with transcription factors in the gene networks that determines neuronal cell fate. Here we show that in the developing spinal cord, the expression of miR-218 is directly upregulated by the Isl1-Lhx3 complex, which drives motor neuron fate. Inhibition of miR-218 suppresses the generation of motor neurons in both chick neural tube and mouse embryonic stem cells, suggesting that miR-218 plays a crucial role in motor neuron differentiation. Results from unbiased RISC-trap screens, in vivo reporter assays and overexpression studies indicated that miR-218 directly represses transcripts that promote developmental programs for interneurons. In addition, we found that miR-218 activity is required for Isl1-Lhx3 to effectively induce motor neurons and suppress interneuron fates. Together our results reveal an essential role of miR-218 as a downstream effector of the Isl1-Lhx3 complex in establishing motor neuron identity.