The serum response factor (SRF) transcription factor is essential for murine embryogenesis. SRF+(-/-) embryos stop developing at the onset of gastrulation, lacking detectable mesoderm. This developmental defect may reflect cell-autonomous impairment of SRF(-/-) embryonic cells in mesoderm formation. Alternatively, it may be caused by a non-cell-autonomous defect superimposed upon inappropriate provision of mesoderm-inducing signals to primitive ectodermal cells. We demonstrate that the ability of SRF(-/-) embryonic stem (ES) cells to differentiate in vitro into mesodermal cells is indeed impaired. However, this impairment can be modulated by external, cell-independent factors. Retinoic acid, but not dimethylsulfoxide, permitted activation of the mesodermal marker gene T(Bra), which was also activated when SRF was expressed in SRF(-/-) ES cells. Embryoid bodies from SRF(-/-) ES cell aggregates also activated mesodermal marker genes, but displayed unusual morphologies and impairment in cavitation. Finally, in nude mice, Srf(-/-) ES cells readily differentiated into mesodermal cells of SRF(-/-) genotype, including cartilage, bone or muscle cells. We demonstrate that SRF contributes to mesodermal gene expression of ES cells and that SRF(-/-) ES cells display a non-cell-autonomous defect in differentiation towards mesoderm.