The formation of the anterior and intermediate lobes of the pituitary gland is a multi-step process regulated by cell–cell interactions involving a number of signaling pathways and by cascades of cell-intrinsic transcription factors. The LIM-homeodoamin protein Lhx3 has previously been shown to play an essential role in the growth of Rathke’s pouch, a primordium of the anterior and intermediate lobes of the pituitary. However, the mechanisms underlying the function and regulation of Lhx3 remain to be elucidated. Here we report that a targeted insertion of a DNA fragment in the 3′-untranslated region of the Lhx3 gene reduces the expression of both Lhx3 mRNA and protein in Rathke’s pouch. Mutant mice homozygous for this Lhx3 allele show severe hypoplasia of the pouch, a defect identical to that observed in Lhx3-null mutants. To gain insights into the mechanism of Lhx3 function in pituitary development, we further analyzed the Lhx3 deficient mutants by examination of early pituitary marker expression, cell proliferation, and cell apoptosis. Our results revealed an increase in cell apoptosis and a loss of Islet1 and Calbindin marker expression in Rathke’s pouch of these mutants. Recently, increased cell apoptosis in Rathke’s pouch has been described in mutant mice impaired in the function of the bicoid-like homeodomain proteins Pitx1 and Pitx2. In those mutants, the expression of Lhx3 is absent. Our results thus underscore the view that Lhx3 functions downstream of the Pitx factors in the same transcriptional cascade that controls growth and early cell differentiation of the developing pituitary gland.