The habenular nuclei are a conserved integrating center in the vertebrate epithalamus, where they modulate diverse behaviors. Despite their importance, our understanding of habenular development is incomplete. Time-lapse imaging and fate mapping demonstrate that the dorsal habenulae (dHb) of zebrafish are derived from dbx1b-expressing (dbx1b+ ) progenitors, which transition into cxcr4b-expressing neuronal precursors. The precursors give rise to differentiated neurons, the axons of which innervate the midbrain interpeduncular nucleus (IPN). Formation of the dbx1b+ progenitor population relies on the activity of the Shh, Wnt and Fgf signaling pathways. Wnt and Fgf function additively to generate dHb progenitors. Surprisingly, Wnt signaling also negatively regulates fgf8a, confining expression to a discrete dorsal diencephalic domain. Moreover, the Wnt and Fgf pathways have opposing roles in transcriptional regulation of components of the Cxcr4-chemokine signaling pathway. The chemokine pathway, in turn, directs the posterior outgrowth of dHb efferents toward the IPN and, when disrupted, results in ectopic, anteriorly directed axonal projections. The results define a signaling network underlying the generation of dHb neurons and connectivity with their midbrain target.