Epithelial-mesenchymal interactions are essential for growth, differentiation, and regeneration of exocrine and endocrine cells in the pancreas. The keratinocyte growth factor (KGF) is derived from mesenchyme and has been shown to promote epithelial cell differentiation and proliferation in a paracrine fashion. Here, we have examined the effect of ectopic expression of KGF on pancreatic differentiation and proliferation in transgenic mice by using the proximal elastase promoter. KGF transgenic mice were generated following standard procedures and analyzed by histology, morphometry, immunohistochemistry, Western blot analysis, and glucose tolerance testing. In KGF transgenic mice, the number of islets, the average size of islets, and the relation of endocrine to exocrine tissue are increased compared with littermate controls. An expansion of the beta-cell population is responsible for the increase in the endocrine compartment. Ectopic expression of KGF results in proliferation of beta-cells and pancreatic duct cells most likely through activation of the protein kinase B (PKB)/Akt signaling pathway. Glucose tolerance and insulin secretion are impaired in transgenic animals. These results provide evidence that ectopic expression of KGF in acinar cells promotes the expansion of the beta-cell lineage in vivo through activation of the PKB/Akt pathway. Furthermore, the observed phenotype demonstrates that an increase in the beta-cell compartment does not necessarily result in an improved glucose tolerance in vivo.