The Drosophila large intestine is initially subdivided into dorsal and ventral domains with distinct cell types, and a one-cell-wide strand of boundary cells is induced between them. Here we show that cell identity and localization of the boundary cells are determined by the combined action of Delta, Notch, and engrailed genes. The prospective dorsal domain of the hindgut primordium expresses engrailed. Engrailed represses Delta, which is ubiquitously expressed throughout the prospective hindgut region in early blastodermal stages, in the dorsal domain, and thus generates a Delta-positive/negative prepattern. Expression of Engrailed protein determines the dorsal domain, while an Engrailed-negative (Delta-positive) region is differentiated into the ventral domain. Delta-positive ventral cells activate a Notch cascade in abutting dorsal cells, and thus induce their differentiation into boundary cells. Mis-expression of a constitutively active Notch intracellular domain causes the entire large intestine to develop as boundary cells. It was also found that the transducing activity of a transmembrane form of activated Notch, which requires further proteolytic processing to generate intracellular fragments, is suppressed in the Delta-positive domain. Delta acts in two distinct ways: it activates the Notch signaling pathway in adjacent Delta-negative cells, and, at the same time, autonomously blocks Notch signaling in Delta-positive cells by affecting Notch processing.