Pygopus has recently been identified in Drosophila as an essential component of the nuclear complex required for canonical Wnt signaling. Here, we have investigated the role of the mammalian pygopus ortholog, mPygo2, in pancreas development. We show that a null mutation of mPygo2 in mice causes pancreas hypoplasia due to decreased progenitor cell proliferation after embryonic day (e) 12.5. During the same time window, mPygo2-deficient embryos begin to display a reduction in endocrine progenitors and consequently a decrease in islet endocrine cell mass. Consistent with its function after e12.5, late-developing endocrine cell types, such as beta, delta and PP cells, are specifically reduced, while the earlier-forming alpha cells develop normally. We find canonical Wnt signaling to be predominantly active in the mesenchyme at the time when mPygo2 is required and demonstrate the dependence of Wnt signal transduction on mPygo2. Furthermore, conditional deletion of mPygo2(flox) allele in the pancreatic epithelium does not phenocopy the defects in mPygo2-null mutants. Since mPygo2 is expressed in the pancreatic mesenchyme and the role of the mesenchyme in epithelial progenitor cell expansion is well documented, our findings suggest an indirect role for mPygo2 in epithelial growth and differentiation through regulation of mesenchymal signals. Together, our data suggest a previously unappreciated role for mesenchymal Wnt signaling in regulating pancreatic organ growth and cell differentiation.