The role of the notochord in inducing and patterning adjacent neural and mesodermal tissues is well established. We provide evidence that the notochord is also required for one of the earliest known steps in the development of the pancreas, an endodermally derived organ. At a developmental stage in chick embryos when the notochord touches the endoderm, removal of notochord eliminates subsequent expression of several markers of dorsal pancreas bud development, including insulin, glucagon and carboxypeptidase A. Pancreatic gene expression can be initiated and maintained in prepancreatic chick endoderm grown in vitro with notochord. Non-pancreatic endoderm, however, does not express pancreatic genes when recombined with the same notochord. The results suggest that the notochord provides a permissive signal to endoderm to specify pancreatic fate in a stepwise manner.