The bmi-1 proto-oncogene has been implicated in B-cell lymphomagenesis in E mu-myc transgenic mice. Distinct domains of the Bmi-1 protein are highly conserved within the Drosophila protein Posterior Sex Combs, a member of the Polycomb group involved in maintaining stable repression of homeotic genes during development. We have inactivated the bmi-1 gene in the germ line of mice by homologous recombination in ES cells. Null mutant mice display three phenotypic alterations: (1) a progressive decrease in the number of hematopoietic cells and an impaired proliferative response of these cells to mitogens; (2) neurological abnormalities manifested by an ataxic gait and sporadic seizures; and (3) posterior transformation, in most cases along the complete anteroposterior axis of the skeleton. The observations indicate that Mbi-1 plays an important role in morphogenesis during embryonic development and in hematopoiesis throughout pre- and postnatal life. Furthermore, these data provide the first evidence of functional conservation of a mammalian Polycomb group homolog.