A large proportion of age-related hearing loss is caused by loss or damage to outer hair cells in the organ of Corti. The organ of Corti is the mechanosensory transducing apparatus in the inner ear and is composed of inner hair cells, outer hair cells, and highly specialized supporting cells. The mechanisms that regulate differentiation of inner and outer hair cells are not known. Here we report that fibroblast growth factor 20 (FGF20) is required for differentiation of cells in the lateral cochlear compartment (outer hair and supporting cells) within the organ of Corti during a specific developmental time. In the absence of FGF20, mice are deaf and lateral compartment cells remain undifferentiated, postmitotic, and unresponsive to Notch-dependent lateral inhibition. These studies identify developmentally distinct medial (inner hair and supporting cells) and lateral compartments in the developing organ of Corti. The viability and hearing loss in Fgf20 knockout mice suggest that FGF20 may also be a deafness-associated gene in humans.