The putative transcription factor ZIC2 is associated with a defect of forebrain development, known as Holoprosencephaly (HPE), in humans and mouse, yet the mechanism by which aberrant ZIC2 function causes classical HPE is unexplained. The zinc finger domain of all mammalian Zic genes is highly homologous with that of the Gli genes, which are transcriptional mediators of Shh signalling. Mutations in Shh and many other Hh pathway members cause HPE and it has been proposed that Zic2 acts within the Shh pathway to cause HPE. We have investigated the embryological cause of Zic2 -associated HPE and the relationship between Zic2 and the Shh pathway using mouse genetics. We show that Zic2 does not interact with Shh to produce HPE. Moreover, molecular defects that are able to account for the HPE phenotype are present in Zic2 mutants before the onset of Shh signalling. Mutation of Zic2 causes HPE via a transient defect in the function of the organizer region at mid-gastrulation which causes an arrest in the development of the prechordal plate (PCP), a structure required for forebrain midline morphogenesis. The analysis provides genetic evidence that Zic2 functions during organizer formation and that the PCP develops via a multi-step process.