The importance of mesenchymal-epithelial interactions for the proper development of the pancreas has been acknowledged since the early 1960s, even though the molecule(s) mediating this process have remained unknown. We demonstrate here that Fgf10, a member of the fibroblast growth factor family (FGFs), plays an essential role in this process. We show that Fgf10 is expressed in the mesenchyme directly adjacent to the early dorsal and ventral pancreatic epithelial buds. In Fgf10^–/– mouse embryos, the evagination of the epithelium and the initial formation of the dorsal and ventral buds appear normal. However, the subsequent growth, differentiation and branching morphogenesis of the pancreatic epithelium are arrested; this is primarily due to a dramatic reduction in the proliferation of the epithelial progenitor cells marked by the production of the homeobox protein PDX1. Furthermore, FGF10 restores the population of PDX1-positive cells in organ cultures derived from Fgf10^–/– embryos. These results indicate that Fgf10 signalling is required for the normal development of the pancreas and should prove useful in devising methods to expand pancreatic progenitor cells.