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The mechanisms of formation of the distinct sensory organs of the inner ear and the non-sensory domains that separate them are still unclear. Here, we show that several sensory patches arise by progressive segregation from a common prosensory domain in the embryonic chicken and mouse otocyst. This process is regulated by mutually antagonistic signals: Notch signalling and Lmx1a. Notch-mediated lateral induction promotes prosensory fate. Some of the early Notch-active cells, however, are normally diverted from this fate and increasing lateral induction produces misshapen or fused sensory organs in the chick. Conversely Lmx1a (or cLmx1b in the chick) allows sensory organ segregation by antagonizing lateral induction and promoting commitment to the non-sensory fate. Our findings highlight the dynamic nature of sensory patch formation and the labile character of the sensory-competent progenitors, which could have facilitated the emergence of new inner ear organs and their functional diversification in the course of evolution.