FGF signaling is critical in the development of the vertebrate retina, which differentiates in a wave-like pattern similar to that found in the Drosophila eye. In this study, we investigated the mechanism of FGF signaling in vertebrate eye development by identifying Shp2, a protein tyrosine phosphatase, as a novel factor in orchestrating retinal morphogenesis. Using a series of Shp2 conditional mutants, we have shown that Shp2 is specifically required for the initiation of retinal neurogenesis but not for the maintenance of the retinal differentiation program. By mosaic deletion of Shp2, we further demonstrated that Shp2 ablation did not prevent the spreading of the retinal differentiation wave. Shp2 instead controls the patterning of the optic vesicle by regulating the retinal progenitor factors and cell proliferation. In ex vivo culture models and genetic rescue experiments, we showed that Shp2 acts downstream to FGF signaling in retinal development and that it can be functionally substituted by activated Ras signaling. Together, these results demonstrate that Shp2 mediates FGF-Ras signaling to control retinal progenitor cell fate.