An experimental model was designed to analyze the effect of fetal gut mesenchyme on the cytodifferentiation of crypt cells and of embryonic progenitor cells. The cells used were the rat intestinal crypt cell line, IEC-17, and primary cell cultures prepared form isolated 14-day-old fetal intestinal endoderm (EC). Both cultures prepared from isolated 14-day-old fetal rat intestinal endoderm (EC). Both types of cells were associated with 14-day-old fetal rat gut mesenchyme (Rm) and grafted under the kidney capsule of adult rats. Seventy percent of the Rm/EC and ten percent of the Rm/IEC recombinants, recovered after 9 days, exhibited well-vascularized structures in which the mesenchyme had induced morphogenesis of the cells into a villus epithelium. The four main intestinal epithelial cell types, absorptive, goblet, endocrine, and Paneth cells, were identified using electron microscopy. Biochemical determinations of enzyme activities associated with brush border membranes revealed that alkaline phosphatase, lactase, sucrase, and maltase were expressed in both types of associations. These results were confirmed by immunofluorescence staining using monoclonal antibodies to brush border enzymes. Both enzyme assays and immunocytochemistry showed that the amount of enzymes present in the brush border membrane of Rm/IEC grafts was in general lower than that of the Rm/EC recombinants. The results indicate that fetal rat gut mesenchyme enables morphogenesis and cytodifferentiation of both crypt and embryonic progenitor cells.