Fez and Fez-like (Fezl) are zinc-finger genes that encode transcriptional repressors expressed in overlapping domains of the forebrain. By generating Fez;Fezl-deficient mice we found that a redundant function of Fez and Fezl is required for the formation of diencephalon subdivisions. The caudal forebrain can be divided into three transverse subdivisions: prethalamus (also called ventral thalamus), thalamus (dorsal thalamus) and pretectum. Fez;Fezl-deficient mice showed a complete loss of prethalamus and a strong reduction of the thalamus at late gestation periods. Genetic marker analyses revealed that during early diencephalon patterning in Fez;Fezl-deficient mice, the rostral diencephalon (prospective prethalamus) did not form and the caudal diencephalon (prospective thalamus and pretectum) expanded rostrally. Fez;Fezl-deficient mice also displayed defects in the formation of the zona limitans intrathalamica (ZLI),which is located on the boundary between the prethalamus and thalamus. Fez and Fezl are expressed in the region rostral to the rostral limit of Irx1 expression, which marks the prospective position of the ZLI. Transgene-mediated misexpression of Fezl or Fez caudal to the ZLI repressed the caudal diencephalon fate and affected the formation of the Shh-expressing ZLI. These data indicate that Fez and Fezl repress the caudal diencephalon fate in the rostral diencephalon, and ZLI formation probably depends on Fez/Fezl-mediated formation of diencephalon subdivisions.