The olfactory system provides an excellent model in which to study cell proliferation, migration, differentiation, axon guidance, dendritic morphogenesis, and synapse formation. We report here crucial roles of the Arx homeobox gene in the developing olfactory system by analyzing its mutant phenotypes. Arx protein was expressed strongly in the interneurons and weakly in the radial glia of the olfactory bulb, but in neither the olfactory sensory neurons nor bulbar projection neurons. Arx-deficient mice showed severe anatomical abnormalities in the developing olfactory system: (1) size reduction of the olfactory bulb, (2) reduced proliferation and impaired entry into the olfactory bulb of interneuron progenitors, (3) loss of tyrosine hydroxylase-positive periglomerular cells, (4) disorganization of the layer structure of the olfactory bulb, and (5) abnormal axonal termination of olfactory sensory neurons in an unusual axon-tangled structure, the fibrocellular mass. Thus, Arx is required for not only the proper developmental processes of Arx-expressing interneurons, but also the establishment of functional olfactory neural circuitry by affecting Arx-non-expressing sensory neurons and projection neurons. These findings suggest a likely role of Arx in regulating the expression of putative instructive signals produced in the olfactory bulb for the proper innervation of olfactory sensory axons.