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Pancreatic development is a classic example of epithelium--mesenchyme interaction. During embryonic life, signals from the mesenchyme control the proliferation of precursor cells within the pancreatic epithelium and their differentiation into endocrine or acinar cells. It has been shown that signals from the mesenchyme activate epithelial cell proliferation but repress development of the pancreatic epithelium into endocrine cells. Here, experiments with specific inhibitors established that mesenchymal effects on epithelial cell development depended on the mitogen-activated protein kinase pathway. Then we demonstrated that these effects of the mesenchyme were mimicked by fibroblast growth factor 7 (FGF7), a specific ligand of FGFR2IIIb, which is a tyrosine kinase receptor of the FGF-receptor family. When pancreatic epithelium expressing FGFR2IIIb was grown with FGF7, epithelial cell growth occurred in a concentration-dependent manner, whereas endocrine tissue development was repressed. The epithelial cells that proliferated in response to FGF7 were endocrine pancreatic precursor cells, as shown by their differentiation en masse into endocrine cells on FGF7 removal. Thus, efficient propagation of pancreatic progenitor cells can be achieved in vitro by exposure to FGF7, which does not affect their ability to differentiate en masse into endocrine cells on FGF7 removal.