The Pax genes comprise a family of transcription factors active in specific tissues during embryonic development and are associated with at least three developmental mutations in mouse and man. In the developing kidney, Pax-2 is expressed in the induced mesenchyme, in the ureter epithelium, and in early epithelial structures derived from the mesenchyme. Pax-2 expression is repressed upon terminal differentiation of the renal tubule epithelium, but persists in the undifferentiated epithelium of human Wilms' tumours. We have produced a dominant gain-of-function mutation in transgenic mice by deregulating the expression of the mouse Pax-2 gene. The data obtained with four independently derived transgenic embryos and with one transgenic line demonstrate that deregulated Pax-2 expression results in histologically abnormal and dysfunctional renal epithelium with properties similar to congenital nephrotic syndrome. Thus, repression of Pax-2 is required for normal kidney development and persistent expression of Pax-2 may restrict the differentiation potential of renal epithelial cells.