In this study, we have investigated the role of the embryonic mesenchyme in the development of the pancreas. We have compared the development in vitro of E12.5 rat pancreatic rudiments grown in the presence or absence of mesenchyme. When the E12.5 pancreatic epithelial rudiment is cultured in the presence of its surrounding mesenchyme, both morphogenesis and cytodifferentiation of the exocrine component of the pancreas are completely achieved, while only a few immature endocrine cells develop. The pancreatic rudiments grown in the absence of mesenchyme develop in a completely different way; the exocrine tissue develops poorly and fails to undergo acinar morphogenesis, while the endocrine tissue develops actively. Four times more insulin-positive cells develop after removal of the mesenchyme than in the cultures performed in the presence of mesenchyme. Moreover, the insulin-expressing cells developed in the mesenchyme-depleted rudiments appear mature since they do not coexpress glucagon, express the glucose transporter Glut-2 and express Rab3A, a molecule associated with the secretory granules. Moreover, these endocrine cells are able to associate and form true islets. Both the inductive effect of the mesenchyme on the proper development of the exocrine tissue and its repressive effect on the development of the endocrine cells are mediated by soluble factors. Follistatin, which is expressed by E12.5 pancreatic mesenchyme, can mimic both inductive and repressive effects of the mesenchyme. Follistatin could thus represent one of the mesenchymal factors required for the development of the exocrine tissue while exerting a repressive role on the differentiation of the endocrine cells.