Pbx1 is a member of the TALE (three–amino acid loop extension) class of homeodomain transcription factors 1, 2, which are components of hetero-oligomeric protein complexes thought to regulate developmental gene expression and to maintain differentiated cell states 3. In vitro studies 4, 5 have shown that Pbx1 regulates the activity of Ipf1 (also known as Pdx1), a ParaHox homeodomain transcription factor 6, 7 required for the development and function of the pancreas in mice and humans 8, 9, 10. To investigate in vivo roles of Pbx1 in pancreatic development and function, we examined pancreatic Pbx1 expression, and morphogenesis, cell differentiation and function in mice deficient 11, 12 for Pbx1. Pbx1−/− embryos had pancreatic hypoplasia and marked defects in exocrine and endocrine cell differentiation prior to death at embryonic day (E) 15 or E16. In these embryos, expression of Isl1 and Atoh5, essential regulators of pancreatic morphogenesis and differentiation, was severely reduced. Pbx1+/− adults had pancreatic islet malformations, impaired glucose tolerance and hypoinsulinemia. Thus, Pbx1 is essential for normal pancreatic development and function. Analysis of trans-heterozygous Pbx1+/− Ipf1+/− mice revealed in vivo genetic interactions between Pbx1 and Ipf1 that are essential for postnatal pancreatic function; these mice developed age-dependent overt diabetes mellitus, unlike Pbx1+/− or Ipf1+/− mice. Mutations affecting the Ipf1 protein may promote diabetes mellitus in mice and humans 13, 14, 15, 16. This study suggests that perturbation of Pbx1 activity may also promote susceptibility to diabetes mellitus.