Elevated glucocorticoids are associated with low birth weight and fetal 'programming' of hypertension and glucose intolerance. In the present paper. we show that treatment of fetal rats with dexamethasone during the last week of gestation reduces the insulin content of their pancreatic beta-cells. We reproduce this effect of dexamethasone ill Vitro using or-an cultures of mouse embryonic pancreas. and show that it is associated with an elevation of expression of the transcription factor C/EBPbeta (CCAAT/ enhancer-binding, protein beta) and a reduction of the transcription factor Pdx-1 (pancreatic duodenal homeobox-1). Dexamethasone also induces the appearance of hepatocyte-like cells in organ cultures of pancreas, based on the expression of liver markers, albumin, alpha1-antitrypsin and transthyretin. Evidence that C/EBPbeta is responsible for compromising the differentiation and later function of beta-cells is obtained from its effects on the beta-cell-like cell line RIN-5F. Transfection with a constitutive form of C/EBPbeta suppresses insulin formation, whereas introduction of a dominant-negative inhibitor of C/EBPbeta has no effect. We conclude that dexamethasone inhibits insulin expression in pancreatic P-cells via a mechanism involving down-regulation of Pdx-1 and induction of C/EBP. This mechanism may operate in combination with other changes during fetal prograrnming, leading to type 2 diabetes in later life.