We have previously shown that a forkhead transcription factor Foxa1 interacts with androgen signaling and controls prostate differentiated response. Here, we show the mouse Foxa1 expression marks the entire embryonic urogenital sinus epithelium (UGE), contrasting with Shh and Foxa2, which are restricted to the basally located cells during prostate budding. The Foxa1-deficient mouse prostate shows a severely altered ductal pattern that resembles primitive epithelial cords surrounded by thick stromal layers. Characterization of these mutant cells indicates a population of basal-like cells similar to those found in the embryonic UGE, whereas no differentiated or mature luminal epithelial cells are found in Foxa1-deficient epithelium. These phenotypic changes are accompanied with molecular aberrations, including focal epithelial activation of Shh and elevated Foxa2 and Notch1 in the null epithelium. Perturbed epithelial-stromal interactions induced by Foxa1-deficient epithelium is evident, as demonstrated by the expansion of surrounding smooth muscle and elevated levels of stromal factors (Bmp4, Fgf7, Fgf10 and Gli). The prostatic homeobox protein Nkx3.1, a known proliferation inhibitor, was downregulated in Foxa1-deficient epithelial cells, while several prostate-specific androgen-regulated markers, including a novel Foxa1 target, are absent in the null prostate. These data indicate that Foxa1 plays a pivotal role in controlling prostate morphogenesis and cell differentiation.