Development of the Drosophila central nervous system begins with the delamination of neural and glial precursors, called neuroblasts, from the neuroectoderm. An early and important step in the generation of neural diversity is the specification of individual neuroblasts according to their position. In this study, we describe the genetic analysis of the msh gene which is likely to play a role in this process. The msh/Msx genes are one of the most highly conserved families of homeobox genes. During vertebrate spinal cord development, Msx genes (Msx1-3) are regionally expressed in the dorsal portion of the developing neuroectoderm. Similarly in Drosophila, msh is expressed in two longitudinal bands that correspond to the dorsal half of the neuroectoderm, and subsequently in many dorsal neuroblasts and their progeny. We showed that Drosophila msh loss-of-function mutations led to cell fate alterations of neuroblasts formed in the dorsal aspect of the neuroectoderm, including a possible dorsal-to-ventral fate switch. Conversely, ectopic expression of msh in the entire neuroectoderm severely disrupted the proper development of the midline and ventral neuroblasts. The results provide the first in vivo evidence for the role of the msh/Msx genes in neural development, and support the notion that they may perform phylogenetically conserved functions in the dorsoventral patterning of the neuroectoderm.