Olig2 is a transcription factor essential for oligodendrocyte and motor neuron development in the spinal cord. Although Olig2 is expressed widely in the embryonic central nervous system, the role of Olig2 in the brain development has not been elucidated. To explore new function of Olig2, we examined forebrain formation in the fetal mice. Olig2 is expressed in the ventricular zone of the prethalamus as early as E9.5, and the loss of Olig2 results in hypoplasia of the prethalamus with the expansion of the ventrally-adjacent thalamic eminence (TE). This altered diencephalon patterning is due to fate change of Olig2 lineage cells from cells of the prospective prethalamus to those of TE in the absence of Olig2. In addition, initial extension of thalamocortical axons (TCAs) is impaired by the loss of Olig2, which leads to abnormal fasciculation in later development. Microarray and in situ hybridization analyses elucidate that Epha3 and Epha5 are up-regulated in accordance with the expansion of the TE in the Olig2 deficient mouse. Dorsal thalamic neurons are inhibited their process extension in vitro on the substrate-bound form of EphA3. These results indicate that Olig2 indirectly controls initial TCA extension through the regulation of proper prethalamus formation.