Differentiation of functional hepatocytes and biliary epithelial cells from immature hepatocytes was analysed in vitro. When fetal mouse liver fragments containing immature hepatocytes but no bile ducts were cultured organotypically, the immature hepatocytes differentiated into large hepatocytes. Some of these expressed bile duct markers such as cytokeratin and Dolichos biflorus agglutinin-binding sites, though only to a small extent, and typical intrahepatic bile duct cells failed to differentiate. Dexamethasone stimulated immature hepatocytes to differentiate into both mature hepatocyte and biliary epithelial cell lineages. Especially in the liver fragments cultured on Matrigel, dexamethasone stimulated the expression of bile duct markers (such as cytokeratin and binding sites for two types of lectin) in the immature hepatocytes. These results support the idea that immature hepatocytes can differentiate into both mature hepatocytes and biliary epithelial cells during normal development of the mouse liver, and suggest that glucocorticoids stimulate both these differentiation pathways. It also seems that basal laminar components may play a role in bile duct differentiation.