Dominant Drop (Dr) mutations are nearly eyeless and have additional recessive phenotypes including lethality and patterning defects in eye and sensory bristles due to cis-regulatory lesions in the cell cycle regulator string (stg). Genetic analysis demonstrates that the dominant small eye phenotype is the result of separate gain-of-function mutations in the closely linked muscle segment homeobox (msh) gene, encoding a homeodomain transcription factor required for patterning of muscle and nervous system. Reversion of the Dr(Mio) allele was coincident with the generation of lethal loss-of-function mutations in msh in cis, suggesting that the dominant eye phenotype is the result of ectopic expression. Molecular genetic analysis revealed that two dominant Dr alleles contain lesions upstream of the msh transcription start site. In the Dr(Mio) mutant, a 3S18 retrotransposon insertion is the target of second-site mutations (P-element insertions or deletions) which suppress the dominant eye phenotype following reversion. The pattern of 3S18 expression and the absence of msh in eye imaginal discs suggest that transcriptional activation of the msh promoter accounts for ectopic expression. Dr dominant mutations arrest eye development by blocking the progression of the morphogenetic furrow leading to photoreceptor cell loss via apoptosis. Gal4-mediated ubiquitous expression of msh in third-instar larvae was sufficient to arrest the morphogenetic furrow in the eye imaginal disc and resulted in lethality prior to eclosion. Dominant mutations in the human msx2 gene, one of the vertebrate homologs of msh, are associated with craniosynostosis, a disease affecting cranial development. The Dr mutations are the first example of gain-of-function mutations in the msh/msx gene family identified in a genetically tractible model organism and may serve as a useful tool to identify additional genes that regulate this class of homeodomain proteins.