Prostasin (CAP1/PRSS8) is a glycosylphosphatidylinositol (GPI)-anchored serine protease that is essential for epithelial development and overall survival in mice. Prostasin is regulated primarily by the transmembrane serine protease inhibitor, hepatocyte growth factor activator inhibitor (HAI)-2, and loss of HAI-2 function leads to early embryonic lethality in mice due to an unregulated prostasin activity. We have recently reported that critical in vivo functions of prostasin can be performed by proteolytically-inactive or zymogen-locked variants of the protease. Here we show that the zymogen form of prostasin does not bind to HAI-2 and, as a result, loss of HAI-2 does not affect prenatal development and survival of mice expressing only zymogen-locked variant of prostasin (Prss8 R44Q). Indeed, HAI-2-deficient mice homozygous for R44Q mutation (Spint2-/-;Prss8R44Q/R44Q) are born in the expected numbers and do not exhibit any obvious developmental abnormality at birth. However, postnatal growth in these mice is severely impaired and they all die within 4 to 7 days after birth due to a critical failure in the development of small and large intestines, characterized by a widespread villous atrophy, tufted villi, near-complete loss of mucin-producing goblet cells, loss of colonic crypt structure, and bleeding into the intestinal lumen. Intestines of Spint2-/-;Prss8R44Q/R44Q mice showed altered expression of epithelial junctional proteins, including reduced levels of EpCAM, E-cadherin, occludin, claudin-1 and -7, as well as an increased level of claudin-4, indicating that the loss of HAI-2 compromises intestinal epithelial barrier function. Our data indicate that the loss of HAI-2 in Prss8R44Q/R44Q mice leads to development of progressive intestinal failure that at both histological and molecular level bears a striking resemblance to human congenital tufting enteropathy, and may provide important clues for understanding and treating this debilitating human disease.