Pax6 expression in the diencephalon of the mouse embryo is restricted both antero-posteriorly and dorso-ventrally, with changes in level occurring at prosomere boundaries. Small eye (Pax6Sey-1Neu) mice homozygous for Pax6 mutations have multiple defects in early forebrain development. In the diencephalon of Pax6Sey-1Neu/Pax6Sey-1Neu mice there is an apparent enlargement of the zona limitans (the boundary region between prosomeres p2 and p3), and a blurring of the p1-p2 boundary. PAX6 function is also required for the normal development of the posterior commissure at the midbrain-p1 boundary. In the posterior diencephalon PAX6 appears to regulate its own transcription, and that of Wnt7b. In p2 and p3, ventral markers are expressed more dorsally than normal, and this is accompanied in p3 by a reduction in the size of the zona incerta. Thus, PAX6 is essential for the normal development and regionalization of the diencephalon.