Fishes of the genus Danio exhibit diverse pigment patterns that serve as useful models for understanding the genes and cell behaviors underlying the evolution of adult form. Among these species, zebrafish D. rerio exhibit several dark stripes of melanophores with sparse iridophores that alternate with light interstripes of dense iridophores and xanthophores. By contrast, the closely related species D. nigrofasciatus has an attenuated pattern with fewer melanophores, stripes and interstripes. Here we demonstrate species differences in iridophore development that presage the fully formed patterns. Using genetic and transgenic approaches we identify the secreted peptide Endothelin-3 (Edn3)-a known melanogenic factor of tetrapods-as contributing to reduced iridophore proliferation and fewer stripes and interstripes in D. nigrofasciatus. We further show the locus encoding this factor is expressed at lower levels in D. nigrofasciatus owing to cis-regulatory differences between species. Finally, we show that functions of two paralogous loci encoding Edn3 have been partitioned between skin and non-skin iridophores. Our findings reveal genetic and cellular mechanisms contributing to pattern differences between these species and suggest a model for evolutionary changes in Edn3 requirements for pigment patterning and its diversification across vertebrates.