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It has been proposed that the Xenopus homeobox gene, XlHbox8, is involved in endodermal differentiation during pancreatic and duodenal development (Wright, C.V.E., Schnegelsberg, P. and De Robertis, E.M. (1988). Development 105, 787-794). To test this hypothesis directly, gene targeting was used to make two different null mutations in the mouse XlHbox8 homolog, pdx-1. In the first, the second pdx-1 exon, including the homeobox, was replaced by a neomycin resistance cassette. In the second, a lacZ reporter was fused in-frame with the N terminus of PDX-1, replacing most of the homeodomain. Neonatal pdx-1 -/- mice are apancreatic, in confirmation of previous reports (Jonsson, J., Carlsson, L., Edlund, T. and Edlund, H. (1994). Nature 371, 606-609). However, the pancreatic buds do form in homozygous mutants, and the dorsal bud undergoes limited proliferation and outgrowth to form a small, irregularly branched, ductular tree. This outgrowth does not contain insulin or amylase-positive cells, but glucagon-expressing cells are found. The rostral duodenum shows a local absence of the normal columnar epithelial lining, villi, and Brunner's glands, which are replaced by a GLUT2-positive cuboidal epithelium resembling the bile duct lining. Just distal of the abnormal epithelium, the numbers of enteroendocrine cells in the villi are greatly reduced. The PDX-1/beta-galactosidase fusion allele is expressed in pancreatic and duodenal cells in the absence of functional PDX-1, with expression continuing into perinatal stages with similar boundaries and expression levels. These results offer additional insight into the role of pdx-1 in the determination and differentiation of the posterior foregut, particularly regarding the proliferation and differentiation of the pancreatic progenitors.