HMG domain transcription factor, Sox2, is a critical gene for the development of cochlear hair cells, the receptor cells for hearing, but this has been ascribed to expansion of the progenitors that become hair cells. Here, we show that Sox2 activated Atoh1, a transcription factor important for hair cell differentiation, through an interaction with the 3' enhancer of Atoh1. Binding to consensus sequences in the Atoh1 enhancer was dependent on the level of Sox2, and the extent of enhancer binding correlated to the extent of activation. Atoh1 activation by Sox2 was required for embryonic hair cell development: deletion of Sox2 in an inducible mutant, even after progenitor cells were fully established, halted development of hair cells, and silencing also inhibited postnatal differentiation of hair cells induced by inhibition of γ-secretase. Sox2 is thus required in the cochlea to both expand the progenitor cells and initiate their differentiation to hair cells.