ADAR1 (adenosine deaminase acting on RNA-1) is widely expressed in mammals, but its biological role is unknown. We show here by gene targeting that ADAR1 selectively edits in vivo two of five closely spaced adenosines in the serotonin 5-hydroxytryptamine subtype 2C receptor pre-mRNA of nervous tissue; and hence, site-selective adenosine-to-inosine editing is indeed a function of ADAR1. Remarkably, homozygosity for two different null alleles of ADAR1 caused a consistent embryonic phenotype appearing early at embryonic day 11 and leading to death between embryonic days 11.5 and 12.5. This phenotype manifests a rapidly disintegrating liver structure, along with severe defects in definitive hematopoiesis, encompassing both erythroid and myeloid/granuloid progenitors as well as spleen colony-forming activity from the aorta-gonad-mesonephros region and fetal liver. Probably as a consequence of these developmental impairments, ADAR1-deficient embryonic stem cells failed to contribute to liver, bone marrow, spleen, thymus, and blood in adult chimeric mice. Thus, ADAR1 subserves critical steps in developing non-nervous tissue, which are likely to include transcript editing.