The visceral yolk sac plays a critical role in normal embryogenesis, yet little is known about the specific molecules that regulate its development. We show here that four winged-helix genes (HNF-3alpha, HNF-3beta, HNF-3gamma and HFH-4) are restricted to visceral endoderm. In the absence of HNF-3beta, visceral endoderm forms but the morphogenetic movements by which the embryo becomes enclosed within its yolk sac are disrupted and serum protein gene transcription is greatly reduced. Hedgehog and Bmp genes, which encode signaling molecules known to play multiple roles in embryonic development, are also differentially expressed in the closely apposed yolk sac mesoderm and endoderm layers. Our results suggest that similar mechanisms may be utilized to mediate inductive interactions in both extraembryonic and embryonic tissues.