Progenitor cells in the mouse olfactory epithelium generate over a thousand subpopulations of neurons, each expressing a unique odorant receptor (OR)gene. This event is under the control of spatial cues, since neurons in different epithelial regions are restricted to express region-specific subsets of OR genes. We show that progenitors and neurons express the LIM-homeobox gene Lhx2 and that neurons in Lhx2-null mutant embryos do not diversify into subpopulations expressing different OR genes and other region-restricted genes such as Nqo1 and Ncam2. Lhx2-/- embryos have, however, a normal distribution of Mash1-positive and neurogenin 1-positive neuronal progenitors that leave the cell cycle, acquire pan-neuronal traits and form axon bundles. Increased cell death in combination with increased expression of the early differentiation marker Neurod1, as well as reduced expression of late differentiation markers (Gαolf and Omp), suggests that neuronal differentiation in the absence of Lhx2 is primarily inhibited at, or immediate prior to, onset of OR expression. Aberrant regional expression of early and late differentiation markers, taken together with unaltered region-restricted expression of the Msx1 homeobox gene in the progenitor cell layer of Lhx2-/- embryos, shows that Lhx2 function is not required for all aspects of regional specification of progenitors and neurons. Thus,these results indicate that a cell-autonomous function of Lhx2 is required for differentiation of progenitors into a heterogeneous population of individually and regionally specified mature olfactory sensory neurons.