A key step in development is the establishment of cell type diversity across a cellular field. Segmental patterning within the Drosophila embryonic epidermis is one paradigm for this process. At each parasegment boundary, cells expressing the Wnt family member Wingless confront cells expressing the homeoprotein Engrailed. The Engrailed-expressing cells normally differentiate as one of two alternative cell types. In investigating the generation of this cell type diversity among the 2-cell-wide Engrailed stripe, we previously showed that Wingless, expressed just anterior to the Engrailed cells, is essential for the specification of anterior Engrailed cell fate. In a screen for additional mutations affecting Engrailed cell fate, we identified anterior open/yan, a gene encoding an inhibitory ETS-domain transcription factor that is negatively regulated by the Rasl-MAP kinase signaling cascade. We find that Anterior Open must be inactivated for posterior Engrailed cells to adopt their correct fate. This is achieved by the EGF receptor (DER), which is required autonomously in the Engrailed cells to trigger the Ras1-MAP kinase pathway. Localized activation of DER is accomplished by restricted processing of the activating ligand, Spitz. Processing is confined to the cell row posterior to the Engrailed domain by the restricted expression of Rhomboid. These cells also express the inhibitory ligand Argos, which attenuates the activation of DER in cell rows more distant from the ligand source. Thus, distinct signals flank each border of the Engrailed domain, as Wingless is produced anteriorly and Spitz posteriorly. Since we also show that En cells have the capacity to respond to either Wingless or Spitz, these cells must choose their fate depending on the relative level of activation of the two pathways.