The kidney is formed from two tissue populations derived from the intermediate mesoderm, the ureteric bud, and the metanephric mesenchyme. Metanephric mesenchyme is a pluripotent renal stem population, and conversion of renal mesenchyme into epithelia depends on the ureteric bud in vivo and in vitro. Embryonic stem (ES) cells have been induced to differentiate into a broad spectrum of specialized cell types in vitro, including hematopoietic, pancreatic, and neuronal cells. Such ES-derived cells can provide a valuable source of progenitor cells. However, whether ES cells can be stimulated by factors secreted from the fetal renal cells to differentiate into renal precursor cells in vitro has not been reported. In this study, we showed that murine ES cells can give rise to embryoid bodies in the absence of leukemia inhibitory factor. Culture conditions were optimized [6 days, 10 ng/ml activin and 10(-7) M retinoic acid (RA)] to generate maximal mesoderm populations specifically expressing Pax2 and brachyury. Results showed that 72% of the cells were brachyury positive by fluorescent activated cell sorter on Day 6 of EB cell differentiation. Conditioned medium collected from cultures of ureteric bud cells from renal cells of a 13-day-old fetus was added to the culture medium. Mesoderm cells were cultured for up to 10 days before showing expression of renal markers, initiation of nephrogenesis (WT-1 and Pax2), and terminally differentiated renal cell types (POD-1 and E-cadherin). This study suggests that ES cells pre-treated by RA and activin can interact with secreted molecules of the fetal renal cells to specifically differentiate into renal precursor cells. Our results provide an experimental basis for the development of in vitro assays to steer differentiation of ES cells toward renal lineages.