Although inductive interactions are known to be essential for specification of cell fate in many vertebrate tissues, the signals and receptors responsible for transmitting this information remain largely unidentified. Mice with mutations in the downless (dl) gene have defects in hair follicle induction, lack sweat glands and have malformed teeth. These structures originate as ectodermal placodes, which invaginate into the underlying mesenchyme and differentiate to form specific organs. Positional cloning of the dl gene began with identification of the transgenic family OVE1. One branch of the family, dl(OVE1B), carries an approximately 600-kb deletion at the dl locus caused by transgene integration. The mutated locus has been physically mapped in this family, and a 200-kb mouse YAC clone, YAC D9, has been identified and shown to rescue the dl phenotype in the spontaneous dl(Jackson) (dl(J), recessive) and Dl(sleek) (Dl(slk), dominant negative) mutants. Here we report the positional cloning of the dl gene, which encodes a novel member of the tumour necrosis factor (Tnf) receptor (Tnfr) family. The mutant phenotype and dl expression pattern suggests that this gene encodes a receptor that specifies hair follicle fate. Its ligand is likely to be the product of the tabby (Ta) gene, as Ta mutants have a phenotype identical to that of dl mutants and Ta encodes a Tnf-like protein.