The homeobox gene goosecoid (gsc) and the winged-helix gene Hepatic Nuclear Factor-3beta (HNF-3beta) are co-expressed in all three germ layers in the anterior primitive streak and at the rostral end of mouse embryos during gastrulation. In this paper, we have tested the possibility of functional synergism or redundancy between these two genes during embryogenesis by generating double-mutant mice for gsc and HNF-3beta. Double-mutant embryos of genotype gsc(-/-);HNF-3beta(+/-) show a new phenotype as early as embryonic days 8.75. Loss of Sonic hedgehog (Shh) and HNF-3beta expression was observed in the notochord and ventral neural tube of these embryos. These results indicate that gsc and HNF-3beta interact to regulate Shh expression and consequently dorsal-ventral patterning in the neural tube. In the forebrain of the mutant embryos, severe growth defects and absence of optic vesicles could involve loss of expression of fibroblast growth factor-8, in addition to Shh. Our results also suggest that interaction between gsc and HNF-3beta regulates other signalling molecules required for proper development of the foregut, branchial arches and heart.