Mouse pancreatic development is critically dependent on epithelial–mesenchymal interactions. The pancreas differs from other epithelial–mesenchymal organs in that the epithelium gives rise to both epithelial exocrine cells and non-epithelial endocrine cells. We studied the nature of the interactions between the epithelium and mesenchyme with respect to the decision between exocrine and endocrine lineages. We show here a tripartite influence of mesenchyme on the developing epithelium. First, close proximity or contact of mesenchyme with the epithelium induces exocrine differentiation. Second, this mesenchymal proximity to the epithelium suppresses endocrine differentiation. Third, mesenchyme has an overall enhancing effect on the degree of insulin differentiation, suggesting a pro-endocrine effect in those epithelial cells at a distance from the mesenchyme. Proximity or contact between the mesenchyme and epithelium appeared to be necessary for the pro-exocrine effects of mesenchyme. We found that, in a co-culture system, NIH3T3 cells were able to substitute for mesenchyme in exocrine induction as well as in both the endocrine induction and endocrine inhibition, implying that the responsible molecules are not unique to pancreatic mesenchyme. Laminin appears to be a key molecule mediating the epithelial–mesenchymal interactions that lead to exocrine differentiation, since inhibition of laminin expression resulted in blockage of the pro-exocrine induction of mesenchyme.