The insulin-, glucagon-, and somatostatin-producing cells in the pancreatic islets derive from a common precursor stem cell and differentiate sequentially during embryonic development, thereby providing an informative model for the study of the transcriptional mechanisms involved in the control of cell-specific gene expression. Relative to the early expression of the glucagon and insulin genes on embryonic days 10 and 12, respectively, the expression of the somatostatin gene is delayed (day 17). The relatively late expression of the somatostatin gene indicates the involvement of both negative and positive transcriptional control mechanisms. We show that the expression of the somatostatin gene in pancreatic islet cells is accomplished by the interplay of both positive and negative cis-regulatory DNA elements. We have characterized the functional properties of one of these positive control elements, the somatostatin gene upstream enhancer element (SMS-UE). The SMS-UE is a pancreatic islet D-cell-specific transcriptional regulator that acts synergistically with the cyclic AMP response element. Mutation-expression and cell-free transcription analyses show that the SMS-UE is a bipartite element with two interdependent functional domains. Our results indicate that the SMS-UE is part of a functional unit that includes other transcriptional control elements of the somatostatin gene proximal promoter, and that they act together to regulate the D-cell-specific transcription of the somatostatin gene in the islet cells of the pancreas.