We have produced null mutant mouse embryonic stem cells for the cell adhesion molecule E-cadherin. Such E-cadherin-/- ES cells are defective in cell aggregation; this defect can be corrected by transfection with cDNA for either E-cadherin or N-cadherin driven by a constitutive promoter. The presence (or absence) of E-cadherin regulates the expression of the transcription factor T-brachyury, indicating that cadherins play a role in linking cell surface receptors and gene expression. Comparative analysis of the parental and the genetically altered ES cell lines was performed to examine cell differentiation and the capability to form organized tissues. While differentiating E-cadherin-/- ES cells are still able to express various early and late differentiation markers, they show a clear-cut deficiency in forming organized structures. This phenotype can be rescued by constitutive expression of E-cadherin, which results exclusively in formation of epithelia. In contrast, rescue transfectants expressing N-cadherin show no epithelial structures, instead forming neuroepithelium and cartilage. These results provide the first evidence that specific cadherins directly stimulate differentiation into certain types of tissues.