Candidate transcription factors involved in pancreatic endocrine development have been isolated using insulin gene regulation as a paradigm. The cell-type restricted basic helix–loop–helix (bHLH) gene, BETA2/NeuroD, expressed in pancreatic endocrine cells, the intestine, and the brain, activates insulin gene transcription and can induce neurons to differentiate. To understand the importance of BETA2 in pancreatic endocrine cell differentiation, mice lacking a functional BETA2 gene were generated by gene targeting experiments. Mice carrying a targeted disruption of theBETA2 gene developed severe diabetes and died perinatally. Homozygous BETA2 null mice had a striking reduction in the number of insulin-producing β cells and failed to develop mature islets. Islet morphogenesis appeared to be arrested between E14.5 and E17.5, a period characterized by major expansion of the β cell population. The presence of severe diabetes in these mice suggests that proper islet structure plays an important role in blood glucose homeostasis. In addition, secretin- and cholecystokinin-producing enteroendocrine cells failed to develop in the absence of BETA2. The absence of these two pancreatic secretagogs may explain the abnormal cellular polarity and inability to secrete zymogen granules in pancreatic acinar exocrine cells. The nervous system appeared to develop normally, despite abundant expression of BETA2 in differentiating neurons. Thus, BETA2 is critical for the normal development of several specialized cell types arising from the gut endoderm.