Retinoids during the embryonic period act as a mesenchymal inducer in many organs, including kidney, lung, central nervous system, and gut. Retinoic acid (RA) demonstrates insulinotropic effects in adult pancreas, but only a limited study has elucidated its role in pancreatic organogenesis. In this study, we have analyzed the existence of RA-signaling machinery in embryonic pancreas and evaluated its role using in vitro tissue culture experiments. Here we show the presence of endogenous retinaldehyde dehydrogenase 2 (RALDH2), the most effective RA-synthesizing enzyme, RA-binding proteins, and RA receptors (RARs) in embryonic pancreatic tissue. RALDH2 is expressed exclusively in the mesenchyme. Exogenously added all-trans-retinoic acid (atRA) in tissue culture experiments stimulated differentiation of endocrine and duct cells and promoted apoptotic cell death of acinar tissue. Furthermore, we demonstrate that atRA upregulates the PDX-1 expression. Taken together, our data suggest that atRA-mediated mesenchymal/epithelial interactions play an important role in determining the cell fate of epithelial cells via regulation of the PDX-1 gene, leading to the proper formation of the endocrine versus exocrine component during pancreatic organogenesis.