The related genes buttonhead (btd) and Drosophila Sp1 (the Drosophila homologue of the human SP1 gene) encode zinc-finger transcription factors known to play a developmental role in the formation of the Drosophila head segments and the mechanosensory larval organs. We report a novel function of btd and Sp1: they induce the formation and are required for the growth of the ventral imaginal discs. They act as activators of the headcase (hdc) and Distal-less (Dll) genes, which allocate the cells of the disc primordia. The requirement for btd and Sp1 persists during the development of ventral discs: inactivation by RNA interference results in a strong reduction of the size of legs and antennae. Ectopic expression of btd in the dorsal imaginal discs (eyes, wings and halteres) results in the formation of the corresponding ventral structures (antennae and legs). However, these structures are not patterned by the morphogenetic signals present in the dorsal discs; the cells expressing btd generate their own signalling system, including the establishment of a sharp boundary of engrailed expression, and the local activation of the wingless and decapentaplegic genes. Thus, the Btd product has the capacity to induce the activity of the entire genetic network necessary for ventral imaginal discs development. We propose that this property is a reflection of the initial function of the btd/Sp1 genes that consists of establishing the fate of the ventral disc primordia and determining their pattern and growth.