The identification of the genetic determinants specifying neuronal networks in the mammalian brain is crucial for the understanding of the molecular and cellular mechanisms that ultimately control cognitive functions. Here we have generated a targeted allele of the LIM-homeodomain-encoding gene Lhx7 by replacing exons 3-5 with a LacZ reporter. In heterozygous animals, which are healthy, fertile and have no apparent cellular deficit in the forebrain, b-galactosidase activity reproduces the pattern of expression of the wild-type Lhx7 locus. However, homozygous mutant mice show severe deficits in forebrain cholinergic neurons (FCNs), while other classes of forebrain neurons appear unaffected. Using the LacZ reporter as a marker, we show that in LHX7-deficient mice FCN progenitors survive but fail to generate cholinergic interneurons in the striatum and cholinergic projection neurons in the basal forebrain. Analysis of behaviour in a series of spatial and non-spatial learning and memory tasks revealed that FCN ablation in Lhx7 mutants is associated with severe deficits in spatial but only mild impairment of non-spatial learning and memory. In addition, we found no deficit in long-term potentiation in mutant animals, suggesting that FCNs modulate hippocampal function independently of its capacity to store information. Overall our experiments demonstrate that Lhx7 expression is required for the specification or differentiation of cholinergic forebrain neurons involved in the processing of spatial information.