The development of distinct vertebrate neurons is defined by the unique profiles of genes that neurons express. It is accepted that neural genes are regulated at the point of transcription initiation, but the role of messenger RNA elongation in neural gene regulation has not been examined. Here we describe the mutant foggy, identified in a genetic screen for mutations that affect neuronal development in zebrafish, that displayed a reduction of dopamine-containing neurons and a corresponding surplus of serotonin-containing neurons in the hypothalamus. Positional cloning disclosed that Foggy is a brain-enriched nuclear protein that is structurally related to the transcription elongation factor Spt5 (refs 5-12). Foggy is not part of the basic transcription apparatus but a phosphorylation-dependent, dual regulator of transcription elongation. The mutation disrupts its repressive but not its stimulatory activity. Our results provide molecular, genetic and biochemical evidence that negative regulators of transcription elongation control key aspects of neuronal development.