Gene trapping in embryonic stem (ES) cells was used to identify a novel gene involved in mouse development. In order to screen trapped ES cell lines for the presence of developmentally regulated genes, an in vitro differentiation test was used. One of the G418 resistant cell lines, in conjunction with the lacZ reporter gene, showed differential expression patterns under differentiated and undifferentiated conditions. The gene trap insertion in this cell line was germ-line transmitted and X-gal staining was used to assess the expression pattern of lacZ in embryos heterozygous for the trapped allele. The reporter gene's expression was detected in commissural neurons in the developing spinal cord, suggesting functions for the trapped gene in mouse neural development. Structural analysis of the cDNA revealed that this trapped gene, named PRDC (protein related to DAN and cerberus), is a novel gene that encodes a putative secretory protein consisting of 168 amino acid residues. PRDC gene product shows limited similarities to the products of DAN (differential screening-selected gene aberrative in neuroblastoma) and cerberus. (DAN is a possible tumor-suppressor for neuroblastoma in human. Cerberus can induce an ectopic head in Xenopus embryos when ectopically expressed.) These three gene products may form a novel family of signaling molecules.