Waardenburg syndrome type 2 (WS2) is an autosomal dominant disorder characterized by a combination of pigmentary and auditory abnormalities. Approximately 20% of WS2 cases are associated with mutations in the gene encoding microphthalmia-associated transcription factor (MITF). MITF plays a critical role in the development of both neural-crest-derived melanocytes and optic cup-derived retinal pigmented epithelium (RPE); the loss of a functional Mitf in mice results in complete absence of all pigment cells, which in turn induces microphthalmia and inner ear deafness. The black-eyed white Mitf(mi-bw) homozygous mouse normally has a pigmented RPE but lacks melanocytes essential for the pigmentation of the body and hearing. We show here that Mitf(mi-bw) is caused by an insertion into intron 3 of a 7.2 kb novel L1 element, L1(bw), which belongs to an actively retrotransposing T(F) subfamily. The L1(bw), insertion reduces the amount of mRNAs for two Mitf isoforms, Mitf-A and Mitf-H, by affecting their overall expression levels and pre-mRNA splicing patterns, while it abolishes mRNA expression of another isoform, Mitf-M, which is specifically expressed in neural-crest-derived melanocytes. The consequence of the L1 insertion in the black-eyed white Mitf(mi-bw) mouse is that the developmental programme for RPE cells proceeds normally, most likely because of the presence of residual, full-length Mitf-A and Mitf-H proteins, whereas the lack of Mitf-M results in loss of the melanocyte population. The results suggest that melanocyte development depends critically on a single Mitf isoform, Mitf-M, and raise the possibility that specific mutations affecting MITF-M, the human equivalent of Mitf-M, may be responsible for a subset of WS2 conditions.