The proper formation of a complex multicellular organism requires the precise coordination of many cellular events, including cell proliferation, cell fate specification and differentiation. The C. elegans postembryonic mesodermal lineage, the M lineage, allows us to study mechanisms coordinating these events at single cell resolution. We have identified an HMX homeodomain protein MLS-2 in a screen for factors required for M lineage patterning. The MLS-2 protein is present in nuclei of undifferentiated cells in the early M lineage and in a subset of head neurons. In the M lineage, MLS-2 activity appears to be tightly regulated at the fourth round of cell division, coincident with the transition from proliferation to differentiation. A predicted null allele of mls-2, cc615, causes reduced cell proliferation in the M lineage, whereas a semi-dominant, gain-of-function allele, tm252, results in increased cell proliferation. Loss or overexpression of mls-2 also affects cleavage orientation and cell fate specification in the M lineage. We show that the increased cell proliferation in mls-2(tm252) mutants requires CYE-1, a G1 cell cycle regulator. Furthermore, the C. elegans Myod homolog HLH-1 acts downstream of mls-2 to specify M-derived coelomocyte cell fates. Thus MLS-2 functions in a cell type-specific manner to regulate both cell proliferation and cell fate specification.