During vertebrate development, the specification of distinct cell types is thought to be controlled by inductive signals acting at different concentration thresholds. The degree of receptor activation in response to these signals is a known determinant of cell fate, but the later steps at which graded signals are converted into all-or-none distinctions in cell identity remain poorly resolved. In the ventral neural tube, motor neuron and interneuron generation depends on the graded activity of the signalling protein Sonic hedgehog (Shh). These neuronal subtypes derive from distinct progenitor cell populations that express the homeodomain proteins Nkx2.2 or Pax6 in response to graded Shh signalling. In mice lacking Pax6, progenitor cells generate neurons characteristic of exposure to greater Shh activity. However, Nkx2.2 expression expands dosally in Pax6 mutants, raising the possibility that Pax6 controls neuronal pattern indirectly. Here we provide evidence that Nkx2.2 has a primary role in ventral neuronal patterning. In Nkx2.2 mutants, Pax6 expression is unchanged but cells undergo a ventral-to-dorsal transformation in fate and generate motor neurons rather than interneurons. Thus, Nkx2.2 has an essential role in interpreting graded Shh signals and selecting neuronal identity.