Pax genes are important regulators of kidney development. In the mouse, homozygous Pax2 inactivation results in renal agenesis, a phenotype that has largely precluded the analysis of Pax gene function during metanephric kidney development. To address this later function, kidney development was analyzed in embryos that were compound heterozygous for Pax2 and for Pax8, a closely related member of the Pax gene family. Both genes are coexpressed in differentiating nephrons and collecting ducts. At the morphological level, Pax2(+/-)Pax8(+/-) metanephric kidneys are severely hypodysplastic and characterized by a reduction in ureter tips and nephron number in comparison with wild-type or Pax2(+/-) kidneys. In developing nephrons, the molecular analysis of Pax2(+/-)Pax8(+/-) kidneys reveals a strong reduction in the expression levels of Lim1, a key regulator of nephron differentiation, accompanied by an increase in apoptosis. At a more mature stage, the reduction of Pax2/8 gene dosage severely affects distal tubule formation, revealing a role for Pax genes in the differentiation of specific nephron segments. At the ureter tips, the expression of Wnt11, a target of glial cell-derived neurotrophic factor-Ret signaling, is significantly reduced, whereas the expression levels of Ret and GDNF remain normal. Together, these results demonstrate a crucial role for Pax2 and Pax8 in nephron differentiation and branching morphogenesis of the metanephros.