The homeobox factor PDX-1 is a key regulator of pancreatic morphogenesis and glucose homeostasis; targeted disruption of the PDX-1 gene leads to pancreatic agenesis in pdx-1(-/-) homozygotes. Pdx-1 heterozygotes develop normally, but they display glucose intolerance in adulthood. Like certain other homeobox proteins, PDX-1 contains a consensus FPWMK motif that promotes heterodimer formation with the ubiquitous homeodomain protein PBX. To evaluate the importance of PDX-1:PBX complexes in pancreatic morphogenesis and glucose homeostasis, we expressed either wild-type or PBX interaction defective PDX-1 transgenes under control of the PDX-1 promoter. Both wild-type and mutant PDX-1 transgenes corrected glucose intolerance in pdx-1 heterozygotes. The wild-type PDX-1 transgene rescued the development of all pancreatic lineages in pdx-1(-/-) animals, and these mice survived to adulthood. In contrast, pancreata from pdx-1(-/-) mice expressing the mutant PDX-1 transgene were hypoplastic, and these mice died within 3 weeks of birth from pancreatic insufficiency. All pancreatic cell types were observed in pdx-1(-/-) mice expressing the mutant PDX-1 transgene; but the islets were smaller, and increased numbers of islet hormone-positive cells were noted within the ductal epithelium. These results indicate that PDX-1:PBX complexes are dispensable for glucose homeostasis and for differentiation of stem cells into ductal, endocrine, and acinar lineages; but they are essential for expansion of these populations during development.