Signalling by the transforming growth factor-beta (TGF-beta) superfamily of proteins depends on the phosphorylation and activation of SMAD proteins by heteromeric complexes of ligand-specific type I and type II receptors with serine/threonine-kinase activity. The vertebrate SMAD family includes at least nine members, of which Smad2 has been shown to mediate signalling by activin and TGF-beta. In Xenopus, Smad2 can induce dorsal mesoderm, mimicking Vg-1, activin and nodal. Here we investigate the function of Smad2 in mammalian development by generating two independent Smad2 mutant alleles in mice by gene targeting. We show that homozygous mutant embryos fail to form an organized egg cylinder and lack mesoderm, like mutant mice lacking nodal or ActRIB, the gene encoding the activin type-I receptor. About 20 per cent of Smad2 heterozygous embryos have severe gastrulation defects and lack mandibles or eyes, indicating that the gene dosage of Smad2 is critical for signalling. Mice trans-heterozygous for both Smad2 and nodal mutations display a range of phenotypes, including gastrulation defects, complex craniofacial abnormalities such as cyclopia, and defects in left-right patterning, indicating that Smad2 may mediate nodal signalling in these developmental processes. Our results show that Smad2 function is essential for early development and for several patterning processes in mice.