The Smad proteins are important intracellular mediators of the transforming growth factor beta (TGFbeta) family of secreted growth factors. Smad1 is an effector of signals provided by the bone morphogenetic protein (BMP) sub-group of TGFbeta molecules. To understand the role of Smad1 in mouse development, we have generated a Smad1 loss-of-function allele using homologous recombination in ES cells. Smad1-/- embryos die by 10.5 dpc because they fail to connect to the placenta. Mutant embryos are first recognizable by 7.0 dpc, owing to a characteristic localized outpocketing of the visceral endoderm at the posterior embryonic/extra-embryonic junction, accompanied by a dramatic twisting of the epiblast and nascent mesoderm. Chimera analysis reveals that these two defects are attributable to a requirement for Smad1 in the extra-embryonic tissues. By 7.5 dpc, Smad1-deficient embryos show a marked impairment in allantois formation. By contrast, the chorion overproliferates, is erratically folded within the extra-embryonic space and is impeded in proximal migration. BMP signals are known to be essential for the specification and proliferation of primordial germ cells. We find a drastic reduction of primordial germ cells in Smad1-deficient embryos, suggesting an essential role for Smad1-dependent signals in primordial germ cell specification. Surprisingly, despite the key involvement of BMP signaling in tissues of the embryo proper, Smad1-deficient embryos develop remarkably normally. An examination of the expression domains of Smad1, Smad5 and Smad8 in early mouse embryos show that, while Smad1 is uniquely expressed in the visceral endoderm at 6.5 dpc, in other tissues Smad1 is co-expressed with Smad5 and/or Smad8. Collectively, these data have uncovered a unique function for Smad1 signaling in coordinating the growth of extra-embryonic structures necessary to support development within the uterine environment.