The thalamus is a subdivision of a part of the brain called the diencephalon which lies between the brain stem and the midbrain. The thalamus is the largest of the structures derived from the diencephalon during embryonic development.

The thalamic complex comprises the prethalamus, the mid-diencephalic organiser (MDO) and the dorsal thalamus (or just thalamus).

After the neural tube has formed in an embryo, the formation of the prethalamus and thalamus is induced and is thought to depend on the interaction between two transcription factors, Fez and Otx. In-between the expression domains of these transcription factors lies the MDO, which orchestrates the development of the thalamus by releasing the necessary cell signalling molecules required for its development. Without the MDO, the thalamus cannot form.

The MDO also later matures into the zona limitans intrathalamica (ZLI), a structure that provides a both a signalling center and a border separating the thalamus and prethalamus.

The MDO induces development of the thalamus through the release of the sonic hedgehog (SHH) protein which induces the differentiation of the thalamic neurons. This signaling results in the expression of the gene neurogenin 1 in the major (caudal) part of the thalamus and of Ascl1 in a small patch of thalamic cells adjacent to the MDO as well as in the prethalamus. The expression of these genes, in turn, gives rise to the differentiation of the glutamatergic neurons (from neurgienin1) and GABAergic neurons (from Ascl1). Animal studies have shown that blocking the SHH pathway leads to a significant reduction of the caudal thalamus.

Research has also shown that a common modification of a cell membrane protein called the serotonin transporter, affects the development of the thalamus in human adults. People who inherit two short alleles (SERT-ss) tend to have more neurons and enlargement of the pulvinar and limbic regions in the thalamus. These individuals seem to be more prone to post-traumatic stress disorder, depression and suicidal tendencies.