The pancreas develops from the endoderm to give rise to ducts, acini and islets of Langerhans. This process involves extracellular signals of the Transforming Growth Factor beta (TGFbeta) family. The aim of this work was to study the effects of activin A, a member of this family, whose potential role in pancreas differentiation is controversial. To this end, we used pancreatic explants from E12.5 mouse embryos. In culture these explants exhibited spontaneous growth, epithelial morphogenesis and endocrine and exocrine differentiation. Exposure to activin A did not affect exocrine or endocrine differentiation. Surprisingly, activin A induced in the explants the appearance of a large contractile structure surrounded by a cylindrical epithelium, a thick basal lamina and a smooth muscle layer. This structure, the formation of which was prevented by follistatin, was typical of an intestinal wall. Consistent with this interpretation, activin A rapidly induced in the explants the mRNAs for fatty acid binding proteins (FABPs), which are markers of the intestine, but not of the pancreas. We also found that induction of the FABPs was preceded by induction of Sonic hedgehog (Shh), a known inducer of intestinal differentiation in the endoderm. Activin B induced neither Shh nor intestinal differentiation. The activin A-mediated intestinal differentiation was blocked by cyclopamine, an inhibitor of Hedgehog signaling, and it was mimicked by Shh. We conclude that activin A does not appear to affect the exocrine or endocrine components of the pancreas, but that it can promote differentiation of pancreatic tissue into intestine via a Shh-dependent mechanism. These findings illustrate the plasticity of differentiation programs in response to extracellular signals in the pancreas and they shed new light on the regulation of pancreas and intestinal development.