Pax gene haploinsufficiency causes a variety of congenital defects. Renal-coloboma syndrome, resulting from mutations in Pax2, is characterized by kidney hypoplasia, optic nerve malformation, and hearing loss. Although this underscores the importance of Pax gene dosage in normal development, how differential levels of these transcriptional regulators affect cell differentiation and tissue morphogenesis is still poorly understood. We show that differential levels of zebrafish Pax2a and Pax8 modulate commitment and behavior in cells that eventually contribute to the otic vesicle and epibranchial placodes. Initially, a subset of epibranchial placode precursors lie lateral to otic precursors within a single Pax2a/8-positive domain; these cells subsequently move to segregate into distinct placodes. Using lineage-tracing and ablation analyses, we show that cells in the Pax2a/8+ domain become biased towards certain fates at the beginning of somitogenesis. Experiments involving either Pax2a overexpression or partial, combinatorial Pax2a and Pax8 loss of function reveal that high levels of Pax favor otic differentiation whereas low levels increase cell numbers in epibranchial ganglia. In addition, the Fgf and Wnt signaling pathways control Pax2a expression: Fgf is necessary to induce Pax2a, whereas Wnt instructs the high levels of Pax2a that favor otic differentiation. Our studies reveal the importance of Pax levels during sensory placode formation and provide a mechanism by which these levels are controlled.