Epithelial-mesenchymal interactions are essential for growth, differentiation and regeneration of exocrine and endocrine cells in the pancreas. The keratinocyte growth factor (KGF) is derived from mesenchyme and has been shown to promote epithelial cell differentiation and proliferation in a paracrine fashion. Here, we have examined the effect of ectopic expression of KGF on pancreatic differentiation and proliferation in transgenic mice using the proximal elastase promoter. KGF transgenic mice were generated following standard procedures and analyzed by histology, morphometry, immunohistochemistry, western blot analysis and glucose tolerance testing. In KGF transgenic mice the number of islets, the average size of islets and the relation of endocrine to exocrine tissue is are increased as compared to littermate controls. An expansion of the -cell population is responsible for the increase of in the endocrine compartment. Ectopic expression of KGF resulted results in proliferation of -cells and pancreatic duct cells most likely through activation of the protein kinase B / AKT signalling pathway. Glucose tolerance and insulin secretion were are impaired in transgenic animals. These results provide evidence that ectopic expression of KGF in acinar cells promotes the expansion of the -cell lineage in vivo through activation of the PKB / AKT pathway. Furthermore, the observed phenotype demonstrates, that an increase in the -cell compartment does not necessarily result in an improved glucose tolerance in vivo.