During vertebrate embryonic development, the paraxial mesoderm is subdivided into metameric subunits called somites. The arrangement and cranio-caudal polarity of the somites governs the metamerism of all somite-derived tissues and spinal ganglia. Little is known about the molecular mechanisms underlying somite formation, segment polarity, maintenance of segment borders, and the interdependency of these processes. The mouse Delta homologue Dll1, a member of the DSL gene family, is expressed in the presomitic mesoderm and posterior halves of somites. Here we report that, in Dll1-deficient mouse embryos, a primary metameric pattern is established in mesoderm, and cytodifferentiation is apparently normal, but the segments have no cranio-caudal polarity, and no epithelial somites form. Caudal sclerotome halves do not condense, and the pattern of spinal ganglia and nerves is perturbed, indicating loss of segment polarity. Myoblasts span segment borders, demonstrating that these borders are not maintained. These results show that Dll1 is involved in compartmentalization of somites, that dermomyotome and sclerotome differentiation are independent of formation of epithelia and subdivision of somites in cranial and caudal halves, and that compartmentalization is essential for the maintenance of segment borders in paraxial mesoderm-derived structures.