HNF-3 beta, a transcription factor of the winged-helix family, is expressed in embryonic and adult endoderm and also in midline cells of the node, notochord, and floor plate in mouse embryos. To define the function of HNF-3 beta, a targeted mutation in the HNF-3 beta locus was generated by homologous recombination in embryonic stem cells. Mice lacking HNF-3 beta die by embryonic day (E) 10-11. Mutant embryos examined from E6.5 to E9.5 do not form a distinct node and lack a notochord. In addition, mutant embryos show marked defects in the organization of somites and neural tube that may result from the absence of the notochord. The neural tube of mutant embryos exhibits overt anteroposterior polarity but lacks a floor plate and motor neurons. Endodermal cells are present but fail to form a gut tube in mutant embryos. These studies indicate that HNF-3 beta has an essential role in the development of axial mesoderm in mouse embryos.