In the cochlea, fibrocytes play important physiological roles, including the maintenance of the ionic composition of the endolymph. Human deafness upon fibrocyte alterations witnesses their crucial role for hearing. We demonstrate that differentiation of otic fibrocytes requires the T-box transcription factor gene Tbx18. Tbx18 expression during inner ear development is restricted to the sub-region of otic mesenchyme that is fated to differentiate into fibrocytes. We rescued the somitic defect that underlies the perinatal lethality of Tbx18-mutant mice by a transgenic approach, and measured auditory brainstem responses. Adult Tbx18-deficient mice showed profound deafness and a complete disruption of the endocochlear potential that is essential for the transduction of sound by sensory hair cells. The differentiation of otic fibrocytes of the spiral ligament was severely compromised. Tissue architecture of the stria vascularis of the lateral wall was disrupted, exhibiting an almost complete absence of the basal cell layer,and a reduction and changes of intermediate and marginal cells, respectively. Stria vascularis defects resulted from the failure of Tbx18-mutant otic fibrocytes to generate the basal cell layer by a mesenchymal-epithelial transition. Defects in otic fibrocyte differentiation may be subordinate to a primary role of Tbx18 in early compartmentalization of the otic mesenchyme, as lineage restriction and boundary formation between otic fibrocytes and the surrounding otic capsule were severely affected in the mutant. Our study sheds light on the genetic control of patterning and differentiation of the otic mesenchyme, uncovers distinct steps of stria vascularis formation and illuminates the importance of non-epithelially-derived otic cell types for normal hearing and the etiology of deafness.