Gfi-1 and Gfi-1b are novel proto-oncogenes identified by retroviral insertional mutagenesis. By gene targeting, we establish that Gfi-1b is required for the development of two related blood lineages, erythroid and megakaryocytic, in mice. Gfi-1b(-/-) embryonic stem cells fail to contribute to red cells of adult chimeras. Gfi-1b(-/-) embryos exhibit delayed maturation of primitive erythrocytes and subsequently die with failure to produce definitive enucleated erythrocytes. The fetal liver of mutant mice contains erythroid and megakaryocytic precursors arrested in their development. Myelopoiesis is normal. Therefore, Gfi-1b is an essential transcriptional regulator of erythroid and megakaryocyte development.