The importance of mesenchymal-epithelial interactions in the proliferation of pancreatic progenitor cells is well established. Here, we provide evidence that the mesenchyme also controls the timing of beta-cell differentiation. When rat embryonic pancreatic epithelium was cultured without mesenchyme, we found first rapid induction in epithelial progenitor cells of the transcription factor neurogenin3 (Ngn3), a master gene controlling endocrine cell-fate decisions in progenitor cells; then beta-cell differentiation occurred. In the presence of mesenchyme, Ngn3 induction was delayed, and few beta-cells developed. This effect of the mesenchyme on Ngn3 induction was mediated by cell-cell contacts and required a functional Notch pathway. We then showed that associating Ngn3-expressing epithelial cells with mesenchyme resulted in poor beta-cell development via a mechanism mediated by soluble factors. Thus, in addition to its effect upstream of Ngn3, the mesenchyme regulated beta-cell differentiation downstream of Ngn3. In conclusion, these data indicate that the mesenchyme controls the timing of beta-cell differentiation both upstream and downstream of Ngn3.