Abstract Palladin was originally found up-regulated with NB4 cell differentiation induced by all-trans retinoic acid. Disruption of palladin results in neural tube closure defects, liver herniation, and embryonic lethality. Here we further report that Palld−/− embryos exhibit a significant defect in erythropoiesis characterized by a dramatic reduction in definitive erythrocytes derived from fetal liver but not primitive erythrocytes from yolk sac. The reduction of erythrocytes is accompanied by increased apoptosis of erythroblasts and partial blockage of erythroid differentiation. However, colony-forming assay shows no differences between wild-type (wt) and mutant fetal liver or yolk sac in the number and size of colonies tested. In addition, Palld−/− fetal liver cells can reconstitute hematopoiesis in lethally irradiated mice. These data strongly suggest that deficient erythropoiesis in Palld−/− fetal liver is mainly due to a compromised erythropoietic microenvironment. As expected, erythroblastic island in Palld−/− fetal liver was found disorganized. Palld−/− fetal liver cells fail to form erythroblastic island in vitro. Interestingly, wt macrophages can form such units with either wt or mutant erythroblasts, while mutant macrophages lose their ability to bind wt or mutant erythroblasts. These data demonstrate that palladin is crucial for definitive erythropoiesis and erythroblastic island formation and, especially, required for normal function of macrophages in fetal liver.