Studies on nonmammalian vertebrate embryos have indicated that retinoic acid (RA) is required for pancreas development. We have analyzed mouse embryos carrying a null mutation of the gene encoding retinaldehyde dehydrogenase 2 (Raldh2), which controls RA synthesis. Raldh2^−/− embryos specifically lack expression of Pdx1 (a homeobox gene required for pancreas development) and Prox1 in dorsal endodermal but not ventral endodermal pancreatic precursor tissues. Ventral endodermal expression of Hex is not affected in Raldh2^−/− embryos, indicating that liver specification is not dependent upon RA. Also, expression of Foxa2 across the dorsoventral axis of the endoderm is not affected in Raldh2^−/− embryos, indicating that a lack of RA does not cause a general defect in foregut endoderm development. Comparison of wild‐type and Raldh2^−/− embryos carrying an RA‐reporter transgene demonstrates that RA activity is normally present throughout the endoderm except in the ventral‐most region but is totally missing in endoderm of Raldh2^−/− embryos. Thus, Raldh2 expressed in adjacent splanchnic lateral plate mesoderm provides an RA signal to dorsal endoderm. Dorsal Pdx1 expression is rescued in Raldh2^−/− embryos by low‐dose maternal administration of RA, which preferentially restores RA‐reporter expression in the dorsal endoderm. Our findings demonstrate a specific role for RA in mouse embryos as a mesodermally synthesized signal needed for dorsal endodermal expression of Pdx1 during development of the dorsal pancreatic lineage. Developmental Dynamics 232:950–957, 2005. © 2005 Wiley‐Liss, Inc.