We have designed an in vitro system in which Madin-Darby canine kidney (MDCK) epithelial cells are cocultured in collagen gels with fibroblasts under conditions precluding heterocellular contact. Using this experimental approach, we have obtained evidence that fibroblast-derived soluble factors play a crucial role in the control of epithelial morphogenesis. First, MDCK cells suspended alone in collagen gels form spherical cysts, whereas in the presence of fibroblasts they form branching tubules. Second, MDCK cells grown as a monolayer on fibroblast-containing collagen gels invade the underlying matrix, within which they form a network of tubules. Third, fibroblast-conditioned medium mimics the effects of coculture by eliciting tubulogenesis by MDCK cells. These results demonstrate the involvement of diffusible paracrine factors in morphogenetic epithelial-mesenchymal interactions and provide a strategy for their molecular characterization.