Activation of the Pax2 gene marks the intermediate mesoderm shortly after gastrulation, as the mesoderm becomes compartmentalized into paraxial, intermediate, and lateral plate. Using an EGFP knock-in allele of Pax2 to identify and sort cells of the intermediate mesodermal lineage, we compared gene expression patterns in EGFP positive cells that were heterozygous or homozygous null for Pax2. Thus, we identified critical regulators of intermediate mesoderm and kidney development whose expression depended on Pax2 function. In cell culture models, Pax2 is thought to recruit epigenetic modifying complex to imprint activating histone methylation marks through interactions with the adaptor protein PTIP. In kidney organ culture, conditional PTIP deletion showed that many Pax2 target genes, which were activated early in renal progenitor cells, remained on once activated, whereas Pax2 target genes expressed later in kidney development were unable to be fully activated without PTIP. In Pax2 mutants, we also identified a set of genes whose expression was up-regulated in EGFP positive cells and whose expression was consistent with a cell fate transformation to paraxial mesoderm and its derivatives. These data provide evidence that Pax2 specifies the intermediate mesoderm and renal epithelial cells through epigenetic mechanisms and in part by repressing paraxial mesodermal fate.