The mouse small intestinal epithelium undergoes continuous renewal throughout life. Previous studies suggest that differentiation of this epithelium is regulated by instructions that are received as cells migrate along crypt-villus units. The nature of the instructions and their intracellular processing remain largely undefined. In this report, we have used genetic mosaic analysis to examine the role of Rac1 GTPase-mediated signaling in controlling differentiation. A constitutively active mutation (Rac1Leu61) or a dominant negative mutation (Rac1Asn17) was expressed in the 129/Sv embryonic stem cell-derived component of the small intestine of C57Bl/6-ROSA26<->129/Sv mice. Rac1Leu61 induces precocious differentiation of members of the Paneth cell and enterocytic lineages in the proliferative compartment of the fetal gut, without suppressing cell division. Forced expression of the dominant negative mutation inhibits epithelial differentiation, without affecting cell division, and slows enterocytic migration along crypt-villus units. The effects produced by Rac1Leu61 or Rac1Asn17 in the 129/Sv epithelium do not spread to adjacent normal C57Bl/6 epithelial cells. These results provide in vivo evidence that Rac1 is involved in the import and intracellular processing of signals that control differentiation of a mammalian epithelium.