Hepatocyte growth factor activator inhibitor type 1 (HAI-1) is a membrane-associated Kunitz-type serine proteinase inhibitor that was initially identified as a potent inhibitor of hepatocyte growth factor activator. HAI-1 is also a cognate inhibitor of matriptase, a membrane-associated serine proteinase. HAI-1 is expressed predominantly in epithelial cells in the human body. Its mRNA is also abundant in human placenta, with HAI-1 specifically expressed by villous cytotrophoblasts. In order to address the precise roles of HAI-1 in vivo, we generated HAI-1 mutant mice by homozygous recombination. Heterozygous HAI-1+/- mice underwent normal organ development. However, homozygous HAI-1-/- mice experienced embryonic lethality which became evident at embryonic day 10.5 postcoitum (E10.5). As early as E9.5, HAI-1-/- embryos showed growth retardation that did not reflect impaired cell proliferation but resulted instead from failed placental development and function. Histological analysis revealed severely impaired formation of the labyrinth layer, in contrast all other placental layers, such as the spongiotrophoblast layer and giant cell layer, which were formed. Our results indicate that mouse HAI-1 is essential for branching morphogenesis in the chorioallantoic placenta and lack of HAI-1 function may result in placental failure.