Heterozygous mutations in the gene encoding the pancreatic homeodomain transcription factor pancreatic duodenal homeobox 1 (PDX1) are associated with maturity onset diabetes of the young, type 4 (MODY4) and type 2 diabetes. Pdx1 governs the early embryonic development of the pancreas and the later differentiation of the insulin-producing islet beta cells of the endocrine compartment. We derived a Pdx1 hypomorphic allele that reveals a role for Pdx1 in the specification of endocrine progenitors. Mice homozygous for this allele displayed a selective reduction in endocrine lineages associated with decreased numbers of endocrine progenitors and a marked reduction in levels of mRNA encoding the proendocrine transcription factor neurogenin 3 (Ngn3). During development, Pdx1 occupies an evolutionarily conserved enhancer region of Ngn3 and interacts with the transcription factor one cut homeobox 1 (Hnf6) to activate this enhancer. Furthermore, mRNA levels of all 4 members of the transcription factor network that regulates Ngn3 expression, SRY-box containing gene 9 (Sox9), Hnf6, Hnf1b, and forkhead box A2 (Foxa2), were decreased in homozygous mice. Pdx1 also occupied regulatory sequences in Foxa2 and Hnf1b. Thus, Pdx1 contributes to specification of endocrine progenitors both by regulating expression of Ngn3 directly and by participating in a cross-regulatory transcription factor network during early pancreas development. These results provide insights that may be applicable to beta cell replacement strategies involving the guided differentiation of ES cells or other progenitor cell types into the beta cell lineage, and they suggest a molecular mechanism whereby human PDX1 mutations cause diabetes.