The midgut and hindgut endoderm of the mouse embryo give rise to the intestinal epithelium, yet it is not known how the intestinal program is chosen in contrast to other endoderm-derived cell types. Previous tissue explant studies with embryos at 8.5 to 11.5 days gestation (d) showed that when the gut mesoderm is removed from the prospective intestinal endoderm, the endoderm activates the expression of liver-specific genes such as serum albumin, demonstrating the endoderm's pluripotence. This reversible repression of liver genes does not affect the expression of the endodermal transcription factors HNF3 and GATA4, nor these factors' ability to engage target sites in chromatin. We have now found that at 13.5 d, the mesoderm gains a second inhibitory activity, resulting in the irreversible loss of expression of HNF3 (Foxa2) and GATA factors in the endoderm and the absence of factors binding to their target sites in chromatin. The second inhibitory activity causes the endoderm to lose the potential to activate a liver gene, and this restriction precedes the normal cytodifferentiation of the intestinal epithelium. In summary, two inhibitory interactions with mesoderm successively restrict the developmental potential of the gut endoderm, leading to intestinal differentiation. We also observed rare gut bud structures in midgestation embryos that appear to represent murine examples of Meckel's Diverticulum, a congenital abnormality in human development. The absence of restrictive mesodermal interactions could explain how Meckel's diverticula express diverse non-intestinal, endoderm-derived cell types.