The transcription factor Sox5 has previously been shown in chicken to be expressed in early neural crest cells and neural crest-derived peripheral glia. Here, we show in mouse that Sox5 expression also continues after neural crest specification in the melanocyte lineage. Despite its continued expression, Sox5 has little impact on melanocyte development on its own as generation of melanoblasts and melanocytes is unaltered in Sox5-deficient mice. Loss of Sox5, however, partially rescued the strongly reduced melanoblast generation and marker gene expression in Sox10 heterozygous mice arguing that Sox5 functions in the melanocyte lineage by modulating Sox10 activity. This modulatory activity involved Sox5 binding and recruitment of CtBP2 and HDAC1 to the regulatory regions of melanocytic Sox10 target genes and direct inhibition of Sox10-dependent promoter activation. Both binding site competition and recruitment of corepressors thus help Sox5 to modulate the activity of Sox10 in the melanocyte lineage.