We have targeted the murine thrombomodulin (TM) gene in embryonic stem cells and generated embryos as well as mice with TM deficiency. The heterozygous TM-deficient (TM+/-) mice as compared to wild-type (TM+/+) littermates exhibit 50% reductions in the levels of TM mRNA and TM protein. However, TM+/- mice appear normal and are free of thrombotic complications. The homozygous TM-deficient (TM-/-) embryos die before embryonic day 9.5. An overall retardation in growth and development of TM-/- embryos is first evident on embryonic day 8.5 (8-12 somite pairs). However, no specific pathologic abnormalities are observed. These initial changes take place at a time when TM is normally expressed in the parietal yolk sac. The removal of embryonic day 7.5 TM-/- embryos from maternal decidua and their subsequent culture in vitro allow development to proceed to stages not observed in vivo (13-20 somite pairs) with the appearance of normal blood vessels in the visceral yolk sac and embryo. The results of our studies suggest that the failure of TM-/- embryos to survive at mid-gestation is a consequence of dysfunctional maternal-embryonic interactions caused by the absence of TM in the parietal yolk sac and demonstrate that the receptor is necessary for normal embryonic development in utero.