The embryonic pancreas is thought to develop from pluripotent endodermal cells that give rise to endocrine and exocrine cells. A key guidance mechanism for pancreatic development has previously been found to be epithelial-mesenchymal interaction. Interactions within the epithelium, however, have not been well studied. Glucagon is the earliest peptide hormone present at appreciable levels in the developing pancreatic epithelium (embryonic day [E]-9.5 in mouse). Insulin accumulation begins slightly later (E11 in mouse), followed by a rapid accumulation during the "second wave" of insulin differentiation ( approximately E15). Here we found that blocking early expression and function of glucagon, but not GLP-1, an alternate gene product of preproglucagon mRNA, prevented insulin-positive differentiation in early embryonic (E11) pancreas. These results suggest a novel concept and a key role for glucagon in the paracrine induction of differentiation of other pancreatic components in the early embryonic pancreas.