The cellular origin and molecular mechanisms regulating pigmentation of head and neck are largely unknown. Melanocyte specification is controlled by the transcriptional activity of Mitf, but no general logic has emerged to explain how Mitf and progenitor transcriptional activities consolidate melanocyte and progenitor cell fates. We show that cranial melanocytes arise from at least two different cellular sources: initially from nerve-associated Schwann cell precursors (SCPs) and later from a cellular source that is independent of nerves. Unlike the midbrain-hindbrain cluster from which melanoblasts arise independently of nerves, a large center of melanocytes in and around cranial nerves IX-X is derived from SCPs, as shown by genetic cell-lineage tracing and analysis of ErbB3-null mutant mice. Conditional gain- and loss-of-function experiments show genetically that cell fates in the neural crest involve both the SRY transcription factor Sox2 and Mitf, which consolidate an SCP progenitor or melanocyte fate by cross-regulatory interactions. A gradual downregulation of Sox2 in progenitors during development permits the differentiation of both neural crest- and SCP-derived progenitors into melanocytes, and an initial small pool of nerve-associated melanoblasts expands in number and disperses under the control of endothelin receptor B (Ednrb) and Wnt5a signaling.