We report the isolation, spatial/temporal expression and gene disruption phenotype of the mouse ONT3 (mONT3) gene, which encodes a novel secreted signaling protein belonging to the Olfactomedin/Noelin/Tiarin family. During early embryogenesis, mONT3 is detected in the proximal region of the allantois on embryonic day (E) 7.25, in the lateral plate mesoderm on E 8.0 and in the CNS and heart on E 8.5. The homozygous mutant is born normal and fertile. For the expression pattern and loss-of-function analyses, we have successfully generated the LacZ-knock-in targeting vector directly from BACs carrying mouse genomic fragments by combining in vivo and in vitro recombination techniques. This approach enables rapid and reproducible construction of the fully functional vectors within two weeks without the use of restriction enzyme digestion and ligation, or the use of PCR-amplification of large genomic fragments. In addition, this method is applicable to rapid generation of transgenic vectors, demonstrating its versatility in reverse genetic studies.