The type III transforming growth factor beta (TGFbeta) receptor (TbetaRIII) binds both TGFbeta and inhibin with high affinity and modulates the association of these ligands with their signaling receptors. However, the significance of TbetaRIII signaling in vivo is not known. In this study, we have sought to determine the role of TbetaRIII during development. We identified the predominant expression sites of TbetaRIII mRNA as liver and heart during midgestation and have disrupted the murine TbetaRIII gene by homologous recombination. Beginning at embryonic day 13.5, mice with mutations in TbetaRIII developed lethal proliferative defects in heart and apoptosis in liver, indicating that TbetaRIII is required during murine somatic development. To assess the effects of the absence of TbetaRIII on the function of its ligands, primary fibroblasts were generated from TbetaRIII-null and wild-type embryos. Our results indicate that TbetaRIII deficiency differentially affects the activities of TGFbeta ligands. Notably, TbetaRIII-null cells exhibited significantly reduced sensitivity to TGFbeta2 in terms of growth inhibition, reporter gene activation, and Smad2 nuclear localization, effects not observed with other ligands. These data indicate that TbetaRIII is an important modulator of TGFbeta2 function in embryonic fibroblasts and that reduced sensitivity to TGFbeta2 may underlie aspects of the TbetaRIII mutant phenotype.