Morphogenesis of sensory hair cells, in particular their mechanotransduction organelle, the stereociliary bundle, requires highly organized remodeling of the actin cytoskeleton. The roles of Rho family small GTPases during this process remain unknown. Here we show that deletion of Rac1 in the otic epithelium resulted in severe defects in cochlear epithelial morphogenesis. The mutant cochlea was severely shortened with a reduced number of auditory hair cells and cellular organization of the auditory sensory epithelium was abnormal. Rac1 mutant hair cells also displayed defects in planar cell polarity and morphogenesis of the stereociliary bundle, including bundle fragmentation or deformation, and mispositioning or absence of the kinocilium. We further demonstrate that a Rac-PAK (p21-activated kinase) signaling pathway mediates kinocilium-stereocilia interactions and is required for cohesion of the stereociliary bundle. Together, these results reveal a critical function of Rac1 in morphogenesis of the auditory sensory epithelium and stereociliary bundle.