Numerous studies have identified the roof plate as an embryonic signaling center critical for dorsal central nervous system patterning, but little is known about mechanisms that control its formation and its separation from clonally related neural crest cells and dI1 sensory interneurons. We demonstrate that the LIM homeodomain transcription factor, Lmx1a, mutated in the dreher mouse, acts to withdraw dorsal spinal cord progenitors from the cell cycle and simultaneously direct their differentiation into functional roof plate cells. Lmx1a cell-autonomously represses the dI1 progenitor fate, distinguishing the roof plate and dI1 interneuron programs, two major developmental programs of the dorsal neural tube. Lmx1a is not directly involved in neural crest development. We establish that Bmp signaling from epidermal ectoderm is necessary and sufficient for inducing Lmx1a and other co-factors that also regulate the extent of roof plate induction. We conclude that Lmx1a controls multiple aspects of dorsal midline patterning and is a major mediator of early Bmp signaling in the developing spinal cord.