The ventral spinal cord generates multiple inhibitory and excitatory interneuron subtypes from four cardinal progenitor domains (p0, p1, p2, p3). Here we show that cell-cell interactions mediated by the Notch receptor play a critical evolutionarily conserved role in the generation of excitatory v2aIN and inhibitory v2bIN interneurons. Lineage-tracing experiments show that the v2aIN and v2bIN develop from genetically identical p2 progenitors. The p2 daughter cell fate is controlled by Delta4 activation of Notch receptors together with MAML factors. Cells receiving Notch signals activate a transcription factor code that specifies the v2bIN fate, whereas cells deprived of Notch signaling express another code for v2aIN formation. Thus, our study provides insight into the cell-extrinsic signaling that controls combinatorial transcription factor profiles involved in regulating the process of interneuron subtype diversification.