Early growth and differentiation of the pancreatic endoderm is regulated by soluble factors from the pancreatic mesenchyme. Previously, we demonstrated that N-cadherin-deficient mice lack a dorsal pancreas, due to a critical role of N-cadherin in dorsal pancreatic mesenchymal cell survival. Here, we show that restoring cardiac and circulatory function in N-cadherin null mice by cardiac-specific expression of N-cadherin, rescues formation of the dorsal pancreas, indicating that the phenotype is secondary to defects related to cardiac/vascular function. Based on this observation, we demonstrate that soluble factors present in plasma, such as sphingosine-1-phosphate, rescue formation of the dorsal pancreas in N-cadherin-deficient mice. We also show that sphingosine-1-phosphate indirectly promotes budding of the pancreatic endoderm by stimulating pancreatic mesenchymal cell proliferation. Finally, we identify sphingosine-1-phosphate receptors within the mesenchyme and show that pertussis toxin blocks the sphingosine-1-phosphate-induced actions, suggesting the involvement of G-protein-coupled sphingosine-1-phosphate receptors. Thus,we propose a new model where blood vessel-derived sphingosine-1-phosphate stimulates growth and budding of the dorsal pancreatic endoderm by induction of mesenchymal cell proliferation.