Embryonic stem (ES) cells are resistant to transforming growth factor beta (TGF beta). We have shown previously that they lack type-II binding receptors (T beta RII) and in this respect resemble the inner cell mass and ectoderm cells of mouse embryos 4.5-7.5 days post coitum (dpc); they do however express type-I (alk-5) signalling receptors. Here we show that in contrast to several tumour cell lines, stable transfection of wtT beta RII is not sufficient for ES cells to become biologically sensitive to TGF beta. We analysed the expression of several down-stream molecules known to be involved in TGF beta signalling (Smads) and TGF beta-mediated cell cycle regulation (cyclins D) during the differentiation of control and wtT beta RII-expressing ES cells and showed that upregulation of these molecules correlated with (i) an increase in plasminogen activator inhibitor-1 (PAI-1) synthesis and (ii) growth inhibition, following addition of TGF beta 1. These TGF beta responses were reduced in an ES cell line expressing a dominant negative (truncated) T beta RII (delta T beta RII). The differentiation pattern of control and wtT beta RII-expressing ES cells was indistinguishable in monolayer culture and as embryoid bodies, but in delta T beta RII ES cells, the capacity to form mesodermal derivatives in monolayer cultures in response to the addition of retinoic acid (RA) and removal of leukemia inhibitory factor (LIF) was lost, and only endoderm-like cells formed. The T beta RII and delta T beta RII ES cells were, however, both distinguishable from control ES cells when allowed to differentiate in chimaeric embryos following aggregation with morula-stage hosts. Conceptuses containing mutant cells, recovered from pseudopregnant females at the equivalent of 9.5 dpc, exhibited highly defective yolk sac development; most strikingly, no blood vessels were present and in addition the yolk sacs with derivatives of ES cells containing wtT beta RII were blistered and lacked haematopoietic cells. The implications for understanding TGF beta signalling in early mouse development are discussed.