Cell lines from the fetal and adult pancreas that were developed by retroviral transfer of the SV40T and ras(val12) oncogenes lose insulin expression but retain extremely low levels of somatostatin and glucagon mRNA. In contrast to expanded populations of primary human islet cells, none of them express the homeodomain transcription factor PDX-1. When that factor was expressed in the cell lines by retroviral-mediated gene transfer, one of the cell lines, TRM-6, derived from human fetal islets, exhibited a 10- to 100-fold increase in somatostatin gene expression. This is the first report of induction of the endogenous somatostatin gene by PDX-1. Promotion of cell-cell contact by aggregation of TRM-6/PDX-1 into islet-like clusters produced a further 10- to 100-fold increase in somatostatin mRNA, to a level similar to that of freshly isolated islets, which resulted in production of somatostatin protein. Thus, we demonstrate here that signals induced by cell-cell contact act in synergy with PDX-1 to up-regulate the endogenous somatostatin promoter in an immortalized cell line from human fetal islets. This system provides a powerful model for studying human islet cell development and, particularly, the role of cell-cell contact in the differentiation process.