Expression of the agouti gene from two different promoters, one active at the midpoint of the hair cycle and the other specific for the ventrum, is responsible for generating a range of mammalian pigmentation patterns. We demonstrate that in postnatal mice transcripts from both promoters are confined to the dermal papilla of hair follicles, as predicted by classical transplantation experiments. Transcripts from the hair cycle promoter are detected in the embryonic whisker plate but not in other regions of the body before birth, whereas ventral-specific transcripts are detected in the ventral trunk of the embryo as well as ventral whisker plate. To investigate further the embryonic origins of adult pigmentation patterns, we carried out a detailed analysis of agouti expression in the embryo. The ventral-specific agouti isoform is first expressed at E10.5 in neural crest-derived ventral cells of the second branchial arch, in anterior regions of the forelimb buds and in a narrow stripe of ventral mesenchyme. By E14.5 a continuous layer of expression is observed in the upper cells of the dermis, including cells of the developing dermal papillae, and covering the entire ventral surface of the head and trunk and dorsal surfaces of the distal forelimb and hindlimb. This expression pattern reflects the domain of yellow coloration evident in adult animals and suggests that the agouti gene is regulated in part by factors responsible for establishing differences between the dorsal and ventral surfaces of the body during embryogenesis. To test the hypothesis that agouti is a paracrine signaling molecule that can influence pigment production by hair follicle melanocytes when expressed by either dermis or epidermis, as suggested by recombination and transplantation experiments, we created transgenic animals in which agouti is expressed in basal cells of the epidermis. These animals display stripes of yellow hairs corresponding to regions of epidermal agouti expression, confirming that agouti signals melanocytes to synthesize yellow pigment and providing direct evidence that it functions in a paracrine manner with a restricted radius of action.