Generation and characterization of knockout mice from targeted embryonic stem (ES) cells have become one of the most powerful approaches to study gene function in vivo. However, experiments to identify targeted ES clones can be both labor-intensive and expensive when the targeting efficiency is low. Using the steroid receptor coactivator-3 (SRC-3) gene as a model, we have developed a rapid and cost-effective method for identification of targeted ES clones. Specifically, a promoterless LacZ sequence was fused to the 5'-coding sequence of SRC-3 in the targeting vector. After homologous recombination in ES cells, LacZ expression was regulated by the endogenous gene promoter. In cases of random insertions the beta-galactosidase would more likely not be produced due to lacking promoter or missing amino acid-reading frame. Accordingly, targeted ES clones were enriched more than 30 times in the population of blue clones positive to X-gal staining. Therefore, targeted ES clones can be selected quickly and economically by X-gal staining in large scale followed by Southern blot analysis on small number of blue clones if the gene of interest is expressed in ES cells. This strategy is particularly useful when the targeting efficiency is low and a reporter such as LacZ or GFP for mouse gene expression is desired.