Transcription factors are key orchestrators of the emergence of neuronal diversity within the developing spinal cord. As such, the two paralogous proteins Pax3 and Pax7 regulate the specification of progenitor cells within the intermediate neural tube, by defining a neat segregation between those fated to form motor circuits and those involved in the integration of sensory inputs. To attain insights into the molecular means by which they control this process, we have performed detailed phenotypic analyses of the intermediate spinal interneurons (IN), namely the dI6, V0D, V0VCG and V1 populations in compound null mutants for Pax3 and Pax7. This has revealed that the levels of Pax3/7 proteins determine both the dorso-ventral extent and the number of cells produced in each subpopulation; with increasing levels leading to the dorsalisation of their fate. Furthermore, thanks to the examination of mutants in which Pax3 transcriptional activity is skewed either towards repression or activation, we demonstrate that this cell diversification process is mainly dictated by Pax3/7 ability to repress gene expression. Consistently, we show that Pax3 and Pax7 inhibit the expression of Dbx1 and of its repressor Prdm12, fate determinants of the V0 and V1 interneurons, respectively. Notably, we provide evidence for the activity of several cis-regulatory modules of Dbx1 to be sensitive to Pax3 and Pax7 transcriptional activity levels. Altogether, our study provides insights into how the redundancy within a TF family, together with discrete dynamics of expression profiles of each member, are exploited to generate cellular diversity. Furthermore, our data supports the model whereby cell fate choices in the neural tube do not rely on binary decisions but rather on inhibition of multiple alternative fates.