Like other tissues and organs in vertebrates, multipotential stem cells serve as the origin of diverse cell types during genesis of the mammalian central nervous system (CNS). During early development, stem cells self-renew and increase their total cell numbers without overt differentiation. At later stages, the cells withdraw from this self-renewal mode, and are fated to differentiate into neurons and glia in a spatially and temporally regulated manner. However, the molecular mechanisms underlying this important step in cell differentiation remain poorly understood. In this study, we present evidence that the expression and function of the neural-specific transcription factors Mash-1 and Prox-1 are involved in this process. In vivo, Mash-1- and Prox-1-expressing cells were defined as a transient proliferating population that was molecularly distinct from self-renewing stem cells. By taking advantage of in vitro culture systems, we showed that induction of Mash-1 and Prox-1 coincided with an initial step of differentiation of stem cells. Furthermore, forced expression of Mash-1 led to the down-regulation of nestin, a marker for undifferentiated neuroepithelial cells, and up-regulation of Prox-1, suggesting that Mash-1 positively regulates cell differentiation. In support of these observations in vitro, we found specific defects in cellular differentiation and loss of expression of Prox-1 in the developing brain of Mash-1 mutant mice in vivo. Thus, we propose that induction of Mash-1 and Prox-1 is one of the critical molecular events that control early development of the CNS.