The Msx1 gene is expressed at sites of epitelium-mesenchymal interaction throughout development and is important in morphogenesis since Msx1 null mice die 24 h. after birth and show defects in craniofacial bones. The Msx1 gene code for a transcription factor activated by BMP4 and, when active, maintains progenitor cells in an undifferentiated state. BMP4 is a crucial factor for hematopoietic development in the murine embryo and although Msx1 is activated by BMP4, there have been no reports relating Msx1 to hematopoiesis. To investigate the role of Msx1 in murine hematopoiesis, samples of hematopoietic tissues (spleen, liver, thymus, bone marrow) and blood collected from 18.5 days post coitum (dpc) fetuses of Msx1 mutant and wild-type embryos were analyzed histologically. Blood cell counts as well as erythropoietic clonogenic assays for liver and bone marrow cells were also done. Histological analysis of the spleen suggested the presence of fewer erythrocytes but more hematopoietic progenitors in mutant embryos. While the bone marrow of wild-type mice had mesenchymal and hematopoietic components, in mutant mice only the hematopoietic component was seen. Hematopoietic progenitors and more mature cells, as well as extracellular matrix, filled the entire bone marrow in heterozygous mutants. In homozygous null mice, this phenotype was enhanced with a poor bone marrow. In hematopoietic colony assays, the liver and bone marrow of Msx1 knockout embryos had a higher number of erythropoietic progenitors whereas peripheral blood had a lower number of erythrocytes compared to wild-type mice. These results suggest that Msx1 plays a role in erythropoietic differentiation since low or null gene expression increased the level of progenitors and decreased the number of differentiated erythroid cells. Msx1 appears to act in mesenchymal cells since in Msx1^-/- embryos the hematopoietic cells were abnormal and the cells that supported hematopoietic development in bone marrow were missing.