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Recent evidence has shown that retinoic acid (RA) signalling is required for early pancreatic development in zebrafish and frog but its role in later development in mammals is less clear cut. In the present study, we determined the effects of RA on the differentiation of the mouse embryonic pancreas. Addition of all-trans retinoic acid (atRA) to embryonic pancreatic cultures induced a number of changes. Branching morphogenesis and exocrine differentiation were suppressed and there was premature formation of endocrine cell clusters (although the total area of beta cells was not different in control and atRA-treated buds). We investigated the mechanism of these changes and found that the premature formation of beta cells was associated with the early expression of high-level Pdx1 in the endocrine cell clusters. In contrast, the suppressive effect of RA on exocrine differentiation may be due to a combination of two mechanisms (i) up-regulation of the extracellular matrix component laminin and (ii) enhancement of apoptosis. We also demonstrate that addition of fibroblast growth factor (FGF)-10 is able to partially prevent apoptosis and rescue exocrine differentiation and branching morphogenesis in atRA-treated cultures but not in mice lacking the FGF receptor 2-IIIb, suggesting the effects of FGF-10 are mediated through this receptor.