Postnatal development of the mammary gland is determined by reciprocal interactions between the ductal epithelia and adjacent stroma. Alx4 is a mesenchymally restricted homeodomain transcription factor expressed in a number of developing tissues, including skin appendages such as hair follicles, whiskers and teeth. We show here that Alx4 is expressed in a subset of ERalpha-expressing mammary stromal cells adjacent to terminal end buds and alveoli during puberty and pregnancy, respectively. Alx4 expression is induced in mammary stromal cells at the onset of puberty and can be induced in prepubescent mice by administration of 17beta-estradiol. In order to determine the role of Alx4 during mammary gland development, we characterized mammary gland development of mice homozygous for the null allele of Alx4, lst(D). Mammary glands from animals lacking Alx4 activity exhibit profound alterations in ductal morphogenesis. Overall development is delayed, ducts being grossly distorted in size and structure. Terminal end buds are also disoriented, displaying aberrant architecture during bifurcation. Despite the developmental delay, the ductal network typically reaches the limits of the fat pad. However, during puberty and in the adult virgin mice, the frequency and density of branch points is significantly reduced. We show further that the defective ductal morphogenesis is due to defects in stromal cells. Specifically, when injected into the cleared fat pad of wild-type recipients, mixed populations of wild-type epithelial cells and Alx4-deficient stromal cells give rise to retarded ductal morphogenesis. Wild-type stromal cells mixed with Alx4-deficient epithelial cells result in normal progression of ductal development. Defective branching morphogenesis in Alx4-deficient females is not due to a loss in expression of HGF, since the level of HGF message in mammary stromal cells is similar in mutant and wild-type littermates. MMP3 is similarly expressed while a 40% increase in MMP2 and a 50% decrease in MMP9 message levels in Alx4-deficient mice relative to their wild-type littermates is observed. Thus, the activity of the stromally restricted homeodomain factor, Alx4, is required for normal branching morphogenesis of the ductal epithelia during pubescent mammary gland development.