The transcription factor Pax6 is widely expressed throughout the developing nervous system, including most alar regions of the newly formed murine diencephalon. Later in embryogenesis its diencephalic expression becomes more restricted. It persists in the developing anterior thalamus (conventionally termed "ventral" thalamus) and pretectum but is downregulated in the body of the posterior (dorsal) thalamus. At the time of this downregulation, the dorsal thalamus forms its major axonal efferent pathway via the ventral telencephalon to the cerebral cortex. This pathway is absent in mice lacking functional Pax6 (small eye homozygotes: Sey/Sey). We tested whether the mechanism underlying this defect includes abnormalities of the dorsal thalamus itself. We exploited a new transgenic mouse ubiquitously expressing green fluorescent protein tagged with tau, in which axonal tracts are clearly visible, and co-cultured dorsal thalamic explants from Pax6(+/+ )or Pax6(Sey/Sey )embryos carrying the transgene with wild-type tissues from other regions of the forebrain. Whereas Pax6(+/+ )thalamic explants produced strong innervation of wild-type ventral telencephalic explants in a pattern that mimicked the thalamocortical tract in vivo, Pax6(Sey)(/Sey) explants did not, indicating a defect in the ability of mutant dorsal thalamic cells to respond to signals normally present in ventral telencephalon. Pax6(Sey)(/Sey) embryos also showed early alterations in the expression of regulatory genes in the region destined to become dorsal thalamus. Whereas in normal mice Nkx2.2 and Lim1/Lhx1 are expressed ventral to this region, in the mutants their expression domains are throughout it, suggesting that a primary action of Pax6 is to generate correct dorsoventral patterning in the diencephalon. Our results suggest that normal thalamocortical development requires the actions of Pax6 within the dorsal thalamus itself.