Pax3/7 paired homeodomain transcription factors are important markers of muscle stem cells. Pax3 is required upstream of myod for lateral dermomyotomal cells in the amniote somite to form particular muscle cells. Later Pax3/7-dependent cells generate satellite cells and most body muscle. Here we analyse early myogenesis from, and regulation of, a population of Pax3-expressing dermomyotome-like cells in the zebrafish. Zebrafish pax3 is widely expressed in the lateral somite and, along with pax7, becomes restricted anteriorly and then to the external cells on the lateral somite surface. Midline-derived Hedgehog signals appear to act directly on lateral somite cells to repress Pax3/7. Both Hedgehog and Fgf8, signals that induce muscle formation within the somite, suppress Pax3/7 and promote expression of myogenic regulatory factors (MRFs) myf5 and myod in specific muscle precursor cell populations. Loss of MRF function leads to loss of myogenesis by specific populations of muscle fibres, with parallel up-regulation of Pax3/7. Myod is required for lateral fast muscle differentiation from pax3-expressing cells. In contrast, either Myf5 or Myod is sufficient to promote slow muscle formation from adaxial cells. Thus, myogenic signals act to drive somite cells to a myogenic fate through up-regulation of distinct combinations of MRFs. Our data show that the relationship between Pax3/7 genes and myogenesis is evolutionarily ancient, but that changes in the MRF targets for particular signals contribute to myogenic differences between species.