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The gene mfh1, encoding a winged helix/forkhead domain transcription factor, is expressed in a dynamic pattern in paraxial and presomitic mesoderm and developing somites during mouse embryogenesis. Expression later becomes restricted to condensing mesenchyme of the vertebrae, head, limbs, and kidney. A targeted disruption of the gene was generated by homologous recombination in embryonic stem cells. Most homozygous mfh1 null embryos die prenatally but some survive to birth, with multiple craniofacial and vertebral column defects. Using molecular markers, we show that the initial formation and patterning of somites occurs normally in mutants. Differentiation of sclerotome-derived cells also appears unaffected, although a reduction of the level of some markers [e.g., mtwist, mf1, scleraxis, and alpha1(II) collagen] is seen in the anterior of homozygous mutants. The most significant difference, however, is a marked reduction in the proliferation of sclerotome-derived cells, as judged by BrdU incorporation. This proliferation defect was also seen in micromass cultures of somite-derived cells treated with transforming growth factor beta1 and fibroblast growth factors. Our findings establish a requirement for a winged helix/forkhead domain transcription factor in the development of the paraxial mesoderm. A model is proposed for the role of mfh1 in regulating the proliferation and differentiation of cell lineages giving rise to the axial skeleton and skull.