Mutations in the EXT1 gene are responsible for human hereditary multiple exostosis type 1. The Drosophila EXT1 homologue, tout-velu, regulates Hedgehog diffusion and signaling, which play an important role in tissue patterning during both invertebrate and vertebrate development. The EXT1 protein is also required for the biosynthesis of heparan sulfate glycosaminoglycans that bind Hedgehog. In this study, we generated EXT1-deficient mice by gene targeting. EXT1 homozygous mutants fail to gastrulate and generally lack organized mesoderm and extraembryonic tissues, resulting in smaller embryos compared to normal littermates. RT-PCR analysis of markers for visceral endoderm and mesoderm development indicates the delayed and abnormal development of both of these tissues. Immunohistochemical staining revealed a visceral endoderm pattern of Indian hedgehog (Ihh) in wild-type E6.5 embryos. However, in both EXT1-deficient embryos and wild-type embryos treated with heparitinase I, Ihh failed to associate with the cells. The effect of the EXT1 deletion on heparan sulfate formation was tested by HPLC and cellular glycosyltransferase activity assays. Heparan sulfate synthesis was abolished in EXT1 -/- ES cells and decreased to less than 50% in +/- cell lines. These results indicate that EXT1 is essential for both gastrulation and heparan sulfate biosynthesis in early embryonic development.