Each of the sensory patches in the epithelium of the inner ear is a mosaic of hair cells and supporting cells. Notch signalling is thought to govern this pattern of differentiation through lateral inhibition. Recent experiments in the chick suggest, however, that Notch signalling also has a prior function - inductive rather than inhibitory - in defining the prosensory patches from which the differentiated cells arise. Several Notch ligands are expressed in each patch, but their individual roles in relation to the two functions of Notch signalling are unclear. We have used a Cre-LoxP approach to knock out two of these ligands, Delta1 (Dll1) and Jagged1 (Jag1), in the mouse ear. In the absence of Dll1, auditory hair cells develop early and in excess, in agreement with the lateral inhibition hypothesis. In the absence of Jag1, by contrast, the total number of these cells is strongly reduced, with complete loss of cochlear outer hair cells and some groups of vestibular hair cells, indicating that Jag1 is required for the prosensory inductive function of Notch. The number of cochlear inner hair cells, however, is almost doubled. This correlates with loss of expression of the cell cycle inhibitor p27(Kip1) (Cdkn1b), suggesting that signalling by Jag1 is also needed to limit proliferation of prosensory cells, and that there is a core part of this population whose prosensory character is established independently of Jag1-Notch signalling. Our findings confirm that Notch signalling in the ear has distinct prosensory and lateral-inhibitory functions, for which different ligands are primarily responsible.