Motor neuron differentiation is accompanied by the expression of a LIM homeodomain transcription factor, Islet1 (ISL1). To assess the involvement of ISL1 in the generation of motor neurons, we analyzed cell differentiation in the neural tube of embryos in which ISL1 expression has been eliminated by gene targeting. Motor neurons are not generated without ISL1, although many other aspects of cell differentiation in the neural tube occur normally. A population of interneurons that express Engrailed1 (EN1), however, also fails to differentiate in Isl1 mutant embryos. The differentiation of EN1+ interneurons can be induced in both wild-type and mutant neural tissue by regions of the neural tube that contain motor neurons. These results show that ISL1 is required for the generation of motor neurons and suggest that motor neuron generation is required for the subsequent differentiation of certain interneurons.