During embryogenesis, the pancreas arises from dorsal and ventral pancreatic protrusions from the primitive gut endoderm upon induction by different stimuli from neighboring mesodermal tissues. Recent studies have shown that Retinoic Acid (RA) signaling is essential for the development of the pancreas in non-mammalian vertebrates. To investigate whether RA regulates mouse pancreas development, we have studied the phenotype of mice with a targeted deletion in the retinaldehyde dehydrogenase 2 (Raldh2) gene, encoding the enzyme required to synthesize RA in the embryo. We show that Raldh2 is expressed in the dorsal pancreatic mesenchyme at the early stage of pancreas specification. RA-responding cells have been detected in pancreatic endodermal and mesenchymal cells. Raldh2-deficient mice do not develop a dorsal pancreatic bud. Mutant embryos lack Pdx 1 expression, an essential regulator of early pancreas development, in the dorsal but not the ventral endoderm. In contrast to Pdx 1-deficient mice, the early glucagon-expressing cells do not develop in Raldh2 knockout embryos. Shh expression is, as in the wild-type embryo, excluded from the dorsal endodermal region at the site where the dorsal bud is expected to form, indicating that the dorsal bud defect is not related to a mis-expression of Shh. Mesenchymal expression of the LIM homeodomain protein Isl 1, required for the formation of the dorsal mesenchyme, is altered in Raldh2--/-- embryos. The homeobox gene Hlxb9, which is essential for the initiation of the pancreatic program in the dorsal foregut endoderm, is still expressed in Raldh2--/-- dorsal epithelium but the number of HB9-expressing cells is severely reduced. Maternal supplementation of RA rescues early dorsal pancreas development and restores endodermal Pdx 1 and mesenchymal Isl 1 expression as well as endocrine cell differentiation. These findings suggest that RA signaling is important for the proper differentiation of the dorsal mesenchyme and development of the dorsal endoderm. We conclude that RA synthesized in the mesenchyme is specifically required for the normal development of the dorsal pancreatic endoderm at a stage preceding Pdx 1 function.