The separation of the optic neuroepithelium into future retina and retinal pigment epithelium (RPE) is a critical event in early eye development in vertebrates. Here we show in mice that the transcription factor PAX6, well-known for its retina-promoting activity, also plays a crucial role in early pigment epithelium development. This role is seen, however, only in a background genetically sensitized by mutations in the pigment cell transcription factor MITF. In fact, a reduction in Pax6 gene dose exacerbates the RPE-to-retina transdifferentiation seen in embryos homozygous for an Mitf null allele, and it induces such a transdifferentiation in embryos that are either heterozygous for the Mitf null allele or homozygous for an RPE-specific hypomorphic Mitf allele generated by targeted mutation. Conversely, an increase in Pax6 gene dose interferes with transdifferentiation even in homozygous Mitf null embryos. Gene expression analyses show that, together with MITF or its paralog TFEC, PAX6 suppresses the expression of Fgf15 and Dkk3. Explant culture experiments indicate that a combination of FGF and DKK3 promote retina formation by inhibiting canonical WNT signaling and stimulating the expression of retinogenic genes, including Six6 and Vsx2. Our results demonstrate that in conjunction with Mitf/Tfec Pax6 acts as an anti-retinogenic factor, whereas in conjunction with retinogenic genes it acts as a pro-retinogenic factor. The results suggest that careful manipulation of the Pax6 regulatory circuit may facilitate the generation of retinal and pigment epithelium cells from embryonic or induced pluripotent stem cells.