Hepatocyte nuclear factor-1beta (HNF-1beta) is a Pit-1/Oct-1/Unc-86 (POU)/homeodomain-containing transcription factor that regulates tissue-specific gene expression in the kidney, liver, pancreas, and other epithelial organs. Mutations of HNF-1beta produce maturity-onset diabetes of the young type 5 (MODY5) and are associated with congenital cystic abnormalities of the kidney. Transgenic mice expressing mutant HNF-1beta under the control of a kidney-specific promoter develop kidney cysts and renal failure, which is similar to the phenotype of humans with MODY5. Similarly, kidney-specific deletion of HNF-1beta using Cre/loxP recombination results in renal cyst formation. HNF-1beta directly regulates the Pkhd1 promoter. HNF-1beta mutant mice show decreased expression of Pkhd1, the gene that is mutated in humans with autosomal-recessive polycystic kidney disease (ARPKD). These studies demonstrate that HNF-1beta is required for the development of the mammalian kidney. They establish a previously unrecognized link between two renal cystic diseases, MODY5 and ARPKD, and suggest that the mechanism of cyst formation in humans with mutations of HNF-1beta involves down-regulation of PKHD1 gene transcription.