OTX2 is a homeodomain transcription factor that is necessary for normal head development in mouse and man. Heterozygosity for loss-of-function alleles causes an incompletely penetrant, haploinsufficiency disorder. Affected individuals exhibit a spectrum of features that range from developmental defects in eye and/or pituitary development to acephaly. To investigate the mechanism underlying the pituitary defects, we used different cre lines to inactivate Otx2 in early head development and in the prospective anterior and posterior lobes. Mice homozygous for Otx2 deficiency in early head development and pituitary oral ectoderm exhibit craniofacial defects and pituitary gland dysmorphology, but normal pituitary cell specification. The morphological defects mimic those observed in humans and mice with OTX2 heterozygous mutations. Mice homozygous for Otx2 deficiency in the pituitary neural ectoderm exhibited altered patterning of gene expression and ablation of FGF signaling. The posterior pituitary lobe and stalk, which normally arise from neural ectoderm, were extremely hypoplastic. Otx2 expression was intact in Rathke's pouch, the precursor to the anterior lobe, but the anterior lobe was hypoplastic. The lack of FGF signaling from the neural ectoderm was sufficient to impair anterior lobe growth, but not the differentiation of hormone-producing cells. This study demonstrates that Otx2 expression in the neural ectoderm is important intrinsically for the development of the posterior lobe and pituitary stalk, and it has significant extrinsic effects on anterior pituitary growth. Otx2 expression early in head development is important for establishing normal craniofacial features including development of the brain, eyes and pituitary gland.