Scleraxis is a basic helix-loop-helix (bHLH) transcription factor shown previously to be expressed in developing chondrogenic cell lineages during embryogenesis. To investigate its function in embryonic development, we produced scleraxis-null mice by gene targeting. Homozygous mutant embryos developed normally until the early egg cylinder stage (embryonic day 6.0), when they became growth-arrested and failed to gastrulate. Consistent with this early embryonic phenotype, scleraxis was found to be expressed throughout the embryo at the time of gastrulation before becoming restricted to chondrogenic precursor cells at embryonic day 9.5. At the time of developmental arrest, scleraxis-null embryos consisted of ectodermal and primitive endodermal cell layers, but lacked a primitive streak or recognizable mesoderm. Analysis of molecular markers of the three embryonic germ layers confirmed that scleraxis mutant embryos were unable to form mesoderm. By generating chimeric embryos, using lacZ-marked scleraxis-null and wild-type embryonic stem cells, we examined the ability of mutant cells to contribute to regions of the embryo beyond the time of lethality of homozygous mutants. Scleraxis-null cells were specifically excluded from the sclerotomal compartment of somites, which gives rise to the axial skeleton, and from developing ribs, but were able to contribute to most other regions of the embryo, including mesoderm-derived tissues. These results reveal an essential early role for scleraxis in mesoderm formation, as well as a later role in formation of somite-derived chondrogenic lineages, and suggest that scleraxis target genes mediate these processes.