The forebrain constitutes the most anterior part of the central nervous system, and is functionally crucial and structurally conserved in all vertebrates. It includes the dorsally positioned telencephalon and eyes, the ventrally positioned hypothalamus, and the more caudally located diencephalon [from rostral to caudal: the prethalamus, the zona limitans intrathalamica (ZLI), the thalamus and the pretectum]. Although antagonizing Wnt proteins are known to establish the identity of the telencephalon and eyes, it is unclear how various subdivisions are established within the diencephalon--a complex integration center and relay station of the vertebrate brain. The conserved forebrain-specific zinc-finger-containing protein Fezl plays a crucial role in regulating neuronal differentiation in the vertebrate forebrain. Here, we report a new and essential role of zebrafish Fezl in establishing regional subdivisions within the diencephalon. First, reduced activity of fezl results in a deficit of the prethalamus and a corresponding expansion of the ZLI. Second, Gal4-UAS-mediated fezl overexpression in late gastrula is capable of expanding the prethalamus telencephalon and hypothalamus at the expense of the ZLI and other fore- and/or mid-brain regions. Such altered brain regionalization is preceded by the early downregulation of wnt expression in the prospective diencephalon. Finally, fezl overexpression is able to restore the anterior forebrain and downregulate wnt expression in Headless- and/or Tcf3 (also known as Tcf7l1a)-deficient embryos. Our findings reveal that Fezl is crucial for establishing regional subdivisions within the diencephalon and may also play a role in the development of the telencephalon and hypothalamus.