In each Malpighian tubule of Drosophila, one cell is singled out, the tip cell, whose function during embryogenesis is to promote cell division in its neighbours. We follow the segregation of this cell, explore the genetic interactions that underlie its specification and demonstrate that tip cell allocation closely resembles neurogenesis. The tip cell arises by division of a tip mother cell, which is selected from a cluster of equivalent cells in each tubule primordium. Each cluster is marked out by the expression of proneural genes and the selection of a single cell from each group involves lateral inhibition, mediated by the neurogenic genes. We confirm the mitogenic role of the tip cell during embryogenesis by mutational analysis and show that it subsequently adopts a second fate, differentiating neural characteristics. We demonstrate that both stages in the differentiation of this cell are established by the same sequence of genetic interactions, which have not previously been shown to occur outside the neurogenic ectoderm.