Hepatocyte growth factor activator inhibitor-1 (HAI-1) is a membrane-associated Kunitz-type serine protease inhibitor that regulates cell surface and extracellular serine proteases involved in tissue remodeling and tumorigenesis, such as HGFA, matriptase, prostasin and hepsin. We generated HAI-1 deficient mice, which died in utero due to placental defects. The HAI-1(-/-) placental labyrinth exhibited a complete failure of vascularization and a compact morphology of the trophoblast layer. Immunofluorescent staining of collagen IV and laminin and electron microscopy analysis revealed that this aberrant labyrinth architecture was associated with disrupted basement membranes located at the interface of chorionic trophoblasts and allantoic mesoderm. Unlike the placental labyrinth, basement membranes and vasculogenesis were normal in embryo and yolk sac. Therefore, basement membrane defects appear to be the underlying cause for the greatly impaired vascularization and trophoblast branching in HAI-1(-/-) placentas. In wild-type placentas, the expression of matriptase and prostasin co-localized with their physiological inhibitor HAI-1 to the labyrinthine trophoblast cells in proximity to basement membranes. In HAI-1(-/-) placentas, both the localization and expression of the two proteases remained unchanged, implying uncontrolled proteolytic activities of the two enzymes. Our study demonstrates the important role of HAI-1 in maintaining the integrity of basement membrane most likely by regulating extracellular proteolytic activities during placental development.