The vertebrate eye develops from the neuroepithelium of the ventral forebrain by the evagination and formation of the optic vesicle. Classical embryological studies have shown that the surrounding extraocular tissues - the surface ectoderm and extraocular mesenchyme - are necessary for normal eye growth and differentiation. We have used explant cultures of chick optic vesicles to study the regulation of retinal pigmented epithelium (RPE) patterning and differentiation during early eye development. Our results show that extraocular mesenchyme is required for the induction and maintenance of expression of the RPE-specific genes Mitf and Wnt13 and the melanosomal matrix protein MMP115. In the absence of extraocular tissues, RPE development did not occur. Replacement of the extraocular mesenchyme with cranial mesenchyme, but not lateral plate mesoderm, could rescue expression of the RPE-marker Mitf. In addition to activating expression of RPE-specific genes, the extraocular mesenchyme inhibits the expression of the neural retina-specific transcription factor Chx10 and downregulates the eye-specific transcription factors Pax6 and Optx2. The TGF(&bgr;) family member activin can substitute for the extraocular mesenchyme by promoting expression of the RPE-specific genes and downregulating expression of the neural retina-specific markers. These data indicate that extraocular mesenchyme, and possibly an activin-like signal, pattern the domains of the optic vesicle into RPE and neural retina.