Striatal projection neurons comprise two populations of striatonigral and striatopallidal neurons. These two neuronal populations play distinct roles in controlling movement-related functions in the basal ganglia circuits. An important issue is how striatal progenitors are developmentally specified into these two distinct neuronal populations. In the present study, we characterized the function of Islet-1 (Isl1), a LIM-homeodomain transcription factor, in striatal development. Genetic fate mapping showed that Isl1⁺ progeny specifically developed into a subpopulation of striatonigral neurons that transiently expressed Isl1. In Nestin-Cre;Isl1^f/f KO mouse brain, differentiation of striatonigral neurons was defective, as evidenced by decreased expression of striatonigral-enriched genes, including substance P, prodynorphin, solute carrier family 35, member D3 (Slc35d3), and PlexinD1. Striatonigral axonal projections were also impaired, and abnormal apoptosis was observed in Isl1 KO striatum. It was of particular interest that striatopallidal-enriched genes, including dopamine D2 receptor (Drd2), proenkephalin, A2A adenosine receptor (A2aR) and G protein-coupled receptor 6 (Gpr6), were concomitantly up-regulated in Isl1 mutant striatum, suggesting derepression of striatopallidal genes in striatonigral neurons in the absence of Isl1. The suppression of striatopallidal genes by Isl1 was further examined by overexpression of Isl1 in the striatum of Drd2-EGFP transgenic mice using in utero electroporation. Ectopic Isl1 expression was sufficient to repress Drd2-EGFP signals in striatopallidal neurons. Taken together, our study suggests that Isl1 specifies the cell fate of striatonigral neurons not only by orchestrating survival, differentiation, and axonal projections of striatonigral neurons but also by suppressing striatopallidal-enriched genes. The dual action of developmental control by Isl1 in promoting appropriate striatonigral but repressing inappropriate striatopallidal genetic profiles may ensure sharpening of the striatonigral identity during development.