The process of adipogenesis is known to involve the interplay of several transcription factors. Activation of one of these factors, the nuclear hormone receptor PPAR gamma, is known to promote fat cell differentiation in vitro. Whether PPAR gamma is required for this process in vivo has remained an open question because a viable loss-of-function model for PPAR gamma has been lacking. We demonstrate here that mice chimeric for wild-type and PPAR gamma null cells show little or no contribution of null cells to adipose tissue, whereas most other organs examined do not require PPAR gamma for proper development. In vitro, the differentiation of ES cells into fat is shown to be dependent on PPAR gamma gene dosage. These data provide direct evidence that PPAR gamma is essential for the formation of fat.