Transcriptional regulatory networks are essential during the formation and differentiation of organs. The transcription factor N-myc is required for proper morphogenesis of the cochlea and to control correct patterning of the organ of Corti. We show here that the Otx2 gene, a mammalian ortholog of the Drosophila orthodenticle homeobox gene, is a crucial target of N-myc during inner ear development. Otx2 expression is lost in N-myc mouse mutants, and N-myc misexpression in the chick inner ear leads to ectopic expression of Otx2. Furthermore, Otx2 enhancer activity is increased by N-myc misexpression, indicating that N-myc may directly regulate Otx2. Inactivation of Otx2 in the mouse inner ear leads to ectopic expression of prosensory markers in non-sensory regions of the cochlear duct. Upon further differentiation, these domains give rise to an ectopic organ of Corti, together with the respecification of non-sensory areas into sensory epithelia, and the loss of Reissner's membrane. Therefore, the Otx2-positive domain of the cochlear duct shows a striking competence to develop into a mirrorimage copy of the organ of Corti. Taken together, these data show that Otx2 acts downstream of N-myc and is essential for patterning and spatial restriction of the sensory domain of the mammalian cochlea.