The p63 gene, a homologue of the tumour-suppressor p53, is highly expressed in the basal or progenitor layers of many epithelial tissues. Here we report that mice homozygous for a disrupted p63 gene have major defects in their limb, craniofacial and epithelial development. p63 is expressed in the ectodermal surfaces of the limb buds, branchial arches and epidermal appendages, which are all sites of reciprocal signalling that direct morphogenetic patterning of the underlying mesoderm. The limb truncations are due to a failure to maintain the apical ectodermal ridge, a stratified epithelium, essential for limb development. The embryonic epidermis of p63-/- mice undergoes an unusual process of non-regenerative differentiation, culminating in a striking absence of all squamous epithelia and their derivatives, including mammary, lacrymal and salivary glands. Taken together, our results indicate that p63 is critical for maintaining the progenitor-cell populations that are necessary to sustain epithelial development and morphogenesis.