In previous experiments we showed that intestinal development was dependent upon epithelial-mesenchymal cell interactions. The aim of this study was to investigate the possible role of retinoic acid (RA), a morphogenetic and differentiating agent, on the gut epithelial-mesenchymal unit. For this purpose we first analyzed the effects of a physiological dose of RA on 14-day fetal rat intestine using short-term organ culture experiments, or long-term grafts under the skin of nude mice. In these conditions, RA accelerated villus outgrowth and epithelial cell differentiation as assessed by the onset of lactase expression, and it also stimulated muscle and crypt formation. In order to analyze potential effects of RA mediated by mesenchymal cells, we isolated and characterized gut mucosa mesenchyme-derived cell cultures (mesenchyme-derived intestinal cell lines, MIC). These cells were shown to express mRNAs for retinoid binding proteins similar to those expressed in situ in the intestinal mesenchyme. MIC cells co-cultured with 14-day intestinal endoderms promoted endodermal cell adhesion and growth, and the addition of exogeneous RA enhanced epithelial cell polarization and differentiation assessed by cytokeratin and lactase immunostaining. Such a differentiating effect of RA was not observed on endodermal cells when cultured without a mesenchymal feeder layer or maintained in conditioned medium from RA-treated MIC cells. In the co-cultures, immunostaining of laminin and collagen IV with polyclonal antibodies, as well as alpha1 and beta1 laminin chains mRNAs (analyzed by RT-PCR) increased concurrently with the RA-enhanced differentiation of epithelial cells. It is worth noting that this stimulation by RA was also obvious on the mesenchymal cells cultured alone. These results show that RA plays a role in intestinal morphogenesis and differentiation. In addition, they indicate that RA acts on the mesenchymal cell phenotype and suggest that RA may modify the mesenchymal-epithelial cell interactions during intestinal development.