The molecular mechanisms that determine glial cell fate in the vertebrate nervous system have not been elucidated. Peripheral glial cells differentiate from pluripotent neural crest cells. We show here that the transcription factor Sox10 is a key regulator in differentiation of peripheral glial cells. In mice that carry a spontaneous or a targeted mutation of Sox10, neuronal cells form in dorsal root ganglia, but Schwann cells or satellite cells are not generated. At later developmental stages, this lack of peripheral glial cells results in a severe degeneration of sensory and motor neurons. Moreover, we show that Sox10 controls expression of ErbB3 in neural crest cells. ErbB3 encodes a Neuregulin receptor, and down-regulation of ErbB3 accounts for many changes in development of neural crest cells observed in Sox10 mutant mice. Sox10 also has functions not mediated by ErbB3, for instance in the melanocyte lineage. Phenotypes observed in heterozygous mice that carry a targeted Sox10 null allele reproduce those observed in heterozygous Sox10(Dom) mice. Haploinsufficiency of Sox10 can thus cause pigmentation and megacolon defects, which are also observed in Sox10(Dom)/+ mice and in patients with Waardenburg-Hirschsprung disease caused by heterozygous SOX10 mutations.