The decision of ectodermal cells to adopt the sensory organ precursor fate in Drosophila is controlled by two classes of basic-helix-loop-helix transcription factors: the proneural Ac and Sc activators promote neural fate, whereas the E(spl) repressors suppress it. We show here that E(spl) proteins m7 and mgamma are potent inhibitors of neural fate, even in the presence of excess Sc activity and even when their DNA-binding basic domain has been inactivated. Furthermore, these E(spl) proteins can efficiently repress target genes that lack cognate DNA binding sites, as long as these genes are bound by Ac/Sc activators. This activity of E(spl)m7 and mgamma correlates with their ability to interact with proneural activators, through which they are probably tethered on target enhancers. Analysis of reporter genes and sensory organ (bristle) patterns reveals that, in addition to this indirect recruitment of E(spl) onto enhancers via protein-protein interaction with bound Ac/Sc factors, direct DNA binding of target genes by E(spl) also takes place. Irrespective of whether E(spl) are recruited via direct DNA binding or interaction with proneural proteins, the co-repressor Groucho is always needed for target gene repression.