We have recently demonstrated that the retinoblastoma family of negative cell cycle regulators can form complexes with a class of developmental factors which contain paired-like (PL) homeodomains (Wiggan et al.  Oncogene 16:227-236). Our screens led to the isolation of a novel PL-homeodomain protein which had been isolated independently by another group and called Alx-4 (Qu et al.  Development 124:3999-4008). Mice homozygous for a targeted null mutation of Alx-4 have several abnormalities, including preaxial polydactyly, suggesting that Alx-4 plays a role in pattern formation in limb buds. In data that we present here, we show that Alx-4 is expressed in mesenchymal condensations of a diverse group of tissues whose development is dependent on epithelial-mesenchymal interactions, many of which are additionally dependent on expression of the HMG-box-containing protein, LEF-1. Alx-4-expressing tissues include osteoblast precursors of most bones, the dermal papilla of hair and whisker follicles, the dental papilla of teeth, and a subset of mesenchymal cells in pubescent mammary glands. We show further that Alx-4 strongly activates transcription from a promoter containing the homeodomain binding site, P2. Optimal activation requires specific sequences in the N-terminal portion of Alx-4 as well as a proline-rich region downstream of the PL-homeodomain, but not the paired-tail at the C terminus. Taken together, our results demonstrate that Alx-4 is a potent transcriptional activator that is expressed at sites of epithelial-mesenchymal interactions during murine embryonic development.