In the pancreas, Notch signaling is thought to prevent cell differentiation, thereby maintaining progenitors in an undifferentiated state. Here, we show that Notch renders progenitors competent to differentiate into ductal and endocrine cells by inducing activators of cell differentiation. Notch signaling promotes the expression of Sox9, which cell-autonomously activates the pro-endocrine gene Ngn3. However, at high Notch activity endocrine differentiation is blocked, as Notch also induces expression of the Ngn3 repressor Hes1. At the transition from high to intermediate Notch activity, only Sox9, but not Hes1, is maintained, thus de-repressing Ngn3 and initiating endocrine differentiation. In the absence of Sox9 activity, endocrine and ductal cells fail to differentiate, resulting in polycystic ducts devoid of primary cilia. Although Sox9 is required for Ngn3 induction, endocrine differentiation necessitates subsequent Sox9 downregulation and evasion from Notch activity via cell-autonomous repression of Sox9 by Ngn3. If high Notch levels are maintained, endocrine progenitors retain Sox9 and undergo ductal fate conversion. Taken together, our findings establish a novel role for Notch in initiating both ductal and endocrine development and reveal that Notch does not function in an on-off mode, but that a gradient of Notch activity produces distinct cellular states during pancreas development.