The neurofibromatosis type II (NF2) tumor suppressor encodes a putative cytoskeletal associated protein, the loss of which leads to the development of Schwann cell tumors associated with NF2 in humans. The NF2 protein merlin belongs to the band 4.1 family of proteins that link membrane proteins to the cytoskeleton and are thought to be involved in dynamic cytoskeletal reorganization. Beyond its membership in this family, however, the function of merlin remains poorly understood. In order to analyze the function of merlin during embryogenesis and to develop a system to study merlin function in detail, we have disrupted the mouse Nf2 gene by homologous recombination in embryonic stem cells. Most embryos homozygous for a mutation at the Nf2 locus fail between embryonic days 6.5 and 7.0, exhibiting a collapsed extraembryonic region and the absence of organized extraembryonic ectoderm. The embryo proper continues to develop, but fails to initiate gastrulation. These observations are supported by the expression patterns of markers of the extraembryonic lineage and the lack of expression of mesodermal markers in the mutant embryos. Mosaic studies demonstrate that merlin function is not required cell autonomously in mesoderm, and support the proposition that merlin function is essential for the development of extraembryonic structures during early mouse development.