The segmentation of neonatal cortex from magnetic resonance (MR) images is much more challenging than the segmentation of cortex in adults. The main reason is the inverted contrast between grey matter (GM) and white matter (WM) that occurs when myelination is incomplete. This causes mislabeled partial volume voxels, especially at the interface between GM and cerebrospinal fluid (CSF). We propose a fully automatic cortical segmentation algorithm, detecting these mislabeled voxels using a knowledge-based approach and correcting errors by adjusting local priors to favor the correct classification. Our results show that the proposed algorithm corrects errors in the segmentation of both GM and WM compared to the classic EM scheme. The segmentation algorithm has been tested on 25 neonates with the gestational ages ranging from ~27 to 45 weeks. Quantitative comparison to the manual segmentation demonstrates good performance of the method (mean Dice similarity: 0.758 ±0.037 for GM and 0.794 ±0.078 for WM).