Functional inactivation of the tumor susceptibility gene tsg101 in NIH 3T3 fibroblasts results in cellular transformation and the ability to form metastatic tumors in nude mice. The N-terminal region of tsg101 protein is structurally similar to the catalytic domain of ubiquitin-conjugating enzymes, suggesting a potential role of tsg101 in ubiquitin-mediated protein degradation. The C-terminal domain of TSG101 can function as a repressor of transcription. To investigate the physiological function of tsg101, we generated a null mutation of the mouse gene by gene targeting. Homozygous tsg101-/- embryos fail to develop past day 6.5 of embryogenesis (E6.5), are reduced in size, and do not form mesoderm. Mutant embryos show a decrease in cellular proliferation in vivo and in vitro but no increase in apoptosis. Although levels of p53 transcripts were not affected in tsg101-/- embryos, p53 protein accumulated dramatically, implying altered posttranscriptional control of p53. In addition, transcription of the p53 effector, cyclin-dependent kinase inhibitor p21(WAF-1/CIP-1), was increased 5- to 10-fold, whereas activation of MDM2 transcription secondary to p53 elevation was not observed. Introduction of a p53 null mutation into tsg101-/- embryos rescued the gastrulation defect and prolonged survival until E8.5. These results demonstrate that tsg101 is essential for the proliferative burst before the onset of gastrulation and establish a functional connection between tsg101 and the p53 pathway in vivo.