Thymic epithelial cells (TECs) are required for T cell maturation within the thymus. In the nude (Foxn1^nu/nu) mouse, TECs fail to differentiate. We have generated a hypomorphic allele called Foxn1^Δ, from which an N-terminal domain was deleted. The phenotype was thymus specific, identifying a tissue-specific activity for this domain. Foxn1^Δ/Δ mice showed abnormal thymic architecture, lacking cortical and medullary domains. In contrast to thymi in mice with the null allele, the Foxn1^Δ/Δ thymus promoted T cell development, but with specific defects at both the double-negative and double-positive stages. Thus, initiation and progression of TEC differentiation are genetically separable functions of Foxn1, and the N-terminal domain is required for crosstalk-dependent TEC differentiation.