The neural cell adhesion molecule (NCAM) is a membrane-associated member of the immunoglobulin superfamily capable of both homophilic and heterophilic binding. To investigate the significance of this binding, a gene targeting strategy in embryonic stem (ES) cells was used to replace the membrane-associated forms of NCAM with a soluble, secreted form of its extracellular domain. Although the heterozygous mutant ES cells were able to generate low coat color chimeric mice, only the wild-type allele was transmitted, suggesting the possibility of dominant lethality. Analysis of chimeric embryos with high level of ES cell contribution revealed severe growth retardation and morphological defects by E8.5-E9.5. The second allele was also targeted, and embryos derived almost entirely from the homozygous mutant ES cells exhibited the same lethal phenotype as observed with heterozygous chimeras. Together, these results indicate that dominant lethality associated with the secreted NCAM does not require the presence of membrane-associated NCAM. Furthermore, the data indicate that potent bioactive cues or signals can be generated by NCAM.