To date, the role of pancreatic hormones in pancreatic islet growth and differentiation is poorly understood. To address this issue, we examined mice with a disruption in the gene encoding prohormone convertase 2 (PC2). These mice are unable to process proglucagon, prosomatostatin, and other neuroendocrine precursors into mature hormones. Initiation of insulin (IN) expression during development was delayed in PC2 mutant mice. Cells containing IN were first detected in knockout embryos on d 15 of development, 5 d later than in wild-type littermates. However, the IN⁺ cells of d 15 PC2 mutant mice coexpressed glucagon, as did the first appearing β-cells of controls. In addition, lack of PC2 perturbed the pattern of expression of transcription factors presumed to be involved in the determination of the mature α-cell phenotype. Thus, in contrast to controls, α-cells of mutant mice had protracted expression of Nkx 6.1 and Pdx-1, but did not express Brn-4. Islets of adult mutant mice also contained cells coexpressing insulin and somatostatin, an immature cell type found only in islets of the wild-type strain during development. In addition to the effects on islet cell differentiation, the absence of PC2 activity resulted in a 3-fold increase in the rate of proliferation of proglucagon cells during the perinatal period. This increase contributed to the development of α-cell hyperplasia during postnatal life. Furthermore, the total β-cell volume was increased 2-fold in adult mutants compared with controls. This increase was due to islet neogenesis, as the number of islets per section was significantly higher in knockout mice compared with wild-type mice, whereas both strains had similar rates of IN cell proliferation. These results indicate that hormones processed by PC2 affected processes that regulate islet cell differentiation and maturation in embryos and adults.