Studies of chimeric mice have disclosed that the stem cell hierarchy in the small intestinal epithelium is established during formation of its proliferative units (crypts of Lieberkuhn). This process involves a selection among several multipotential progenitors so that ultimately only one survives to supply descendants to the fully formed crypt. In this report, we examine the hypothesis that the level of beta-catenin (beta-cat)-mediated signaling is an important factor regulating this stem cell selection. In the canonical Wnt signaling pathway, beta-catenin can partner with Lef-1/Tcf high mobility group (HMG) box transcription factors to control gene expression. Both Lef-1 and Tcf-4 mRNAs are produced in the fetal mouse small intestine. Tcf-4 expression is sustained, whereas Lef-1 levels fall as crypt formation is completed during the first two postnatal weeks. A Tcf-4 gene knockout is known to block intestinal epithelial proliferation in late fetal life. Therefore, to test the hypothesis, we enhanced beta-catenin signaling in a chimeric mouse model in which the stem cell selection could be monitored. A fusion protein containing the HMG box domain of Lef-1 linked to the trans-activation domain of beta-catenin (Lef-1/beta-cat) was constructed to promote direct stimulation of signaling without being retained in the cytoplasm through interactions with E-cadherin and Apc/Axin. Lef-1/beta-cat was expressed in 129/Sv embryonic stem cell-derived small intestinal epithelial progenitors present in developing B6-ROSA26<-->129/Sv chimeras. Lef-1/beta-cat stimulated expression of a known beta-catenin target (E-cadherin), suppressed expression of Apc and Axin, and induced apoptosis in 129/Sv but not in neighboring B6-ROSA26 epithelial cells. This apoptotic response was not associated with any detectable changes in cell division within the Lef-1/beta-cat-expressing epithelium. By the time crypt development was completed, all 129/Sv epithelial cells were lost. These results indicate that developmental changes in beta-catenin-mediated signaling can play an important role in establishing a stem cell hierarchy during crypt morphogenesis.