Interaction between the epithelium and the mesenchyme is an essential feature of organogenesis, including hair follicle formation. The dermal papilla (DP), a dense aggregate of specialized dermis-derived stromal cells located at the bottom of the follicle, is a major component of hair that signals the follicular epithelial cells to prolong the hair growth process. However, little is known about DP-specific gene activation with regard to hair induction. In this study we demonstrate that a short fragment (839 bp) of the human versican (a core protein of one of the matrix chondroitin sulfate proteoglycans) promoter is sufficient to activate lacZ reporter gene expression in the DP of postnatal transgenic mice and also in the condensed mesenchyme (the origin of the DP) beneath the hair placode during hair follicle embryogenesis. Using the same versican promoter with green f luorescent protein (GFP), large numbers of fresh pelage DP cells were isolated from newborn transgenic skin by high-speed cell sorting. These GFP-positive DP cells showed abundant versican mRNA, confirming that the reporter molecules ref lected endogenous versican gene expression. These sorted GFPpositive cells showed DP-like morphology in culture, but both GFP and versican expression was lost during primary culture. In vivo hair growth assays showed that GFP-positive cells could induce hair when grafted with epithelial cells, whereas GFP-negative cells grafted with epithelium or GFP-positive cells alone did not. These results suggest that versican may play an essential role both in mesenchymal condensation and in hair induction.Epithelial-mesenchymal interaction during development is essential for the induction of organogenesis for many tissues (e.g., kidney, gut, respiratory organ, cutaneous appendage). Among these, the hair follicle provides an excellent model for studying epithelial-mesenchymal interactions because (i) it is located on the outermost layer of the body, allowing easy access and observation; (ii) it has distinct epithelial and mesenchymal components; and (iii) a definitive functional assay for in vivo hair induction already exists (1).The dermal papilla (DP) is located at the bottom of the hair follicle and is the major mesenchymal component. The DP originates from condensed mesenchymal cells that lie beneath the epithelial hair germ cells (placode) in embryonic skin. These specialized mesenchymal cells are believed to be the source of the dermal-derived signaling molecule(s) involved in hair follicle development and embryogenesis and, later, in postnatal hair cycling (2). Hair follicle development during embryogenesis requires a series of reciprocal interactions between the epithelium and the underlying mesenchymal cells. Initially, the dermal mesenchyme signals the epithelium to form the epidermal placode. In response, the epithelium sends a message to the underlying mesenchyme to initiate mesenchymal condensation. The condensed mesenchyme then sends a message back to the epithelium, promoting hair elongation (3). Recen...