The subcortical telencephalon is the major source of GABAergic interneurons that, during development, tangentially migrate to the cerebral cortex, where they modulate the glutamatergic excitatory action of pyramidal cells. The transcription factor Vax1, an intracellular mediator of both Shh and Fgf signaling, is expressed at high levels in the medial and lateral ganglionic eminences (MGE and LGE, respectively), in the septal area (SA), in the anterior entopeduncular area (AEP) and in the preoptic area (POA). We show that Vax1 expression in the neuroepithelium is graded: low in the ventricular zone (VZ) and high in the subventricular zone (SVZ), in a pattern that closely reproduces that of several members of the Dlx and Gsh family of homeobox transcription factors. We provide evidence that Vax1 plays an important role in proliferation and differentiation of MGE, POA/AEP and septum, and that the last structure is completely absent in Vax1-/- mice. We show that the absence of Vax1 causes a severe depletion of GABAergic neurons in the neocortex, ranging from 30% to 44%, depending on the cortical areas considered. Taken together, our data indicate that a loss of function mutation in the Vax1 gene generates abnormalities in basal ganglia subventricular zone development and that it prevents the formation of the septum, impairing GABAergic interneuron generation.