The paired box transcription factor Pax7 was isolated by representational difference analysis as a gene specifically expressed in cultured satellite cell-derived myoblasts. In situ hybridization revealed that Pax7 was also expressed in satellite cells residing in adult muscle. Cell culture and electron microscopic analysis revealed a complete absence of satellite cells in Pax7(-/-) skeletal muscle. Surprisingly, fluorescence-activated cell sorting analysis indicated that the proportion of muscle-derived stem cells was unaffected. Importantly, stem cells from Pax7(-/-) muscle displayed almost a 10-fold increase in their ability to form hematopoietic colonies. These results demonstrate that satellite cells and muscle-derived stem cells represent distinct cell populations. Together these studies suggest that induction of Pax7 in muscle-derived stem cells induces satellite cell specification by restricting alternate developmental programs.