Heparan sulfate proteoglycans have been implicated in the presentation of a number of secreted signaling molecules to their signal-transducing receptors. We have characterized a gene trap mutation in the gene encoding a heparan sulfate biosynthetic enzyme, heparan sulfate 2-sulfotransferase (HS2ST). Transgenic mice were generated from embryonic stem cells harboring this insertion. lacZ reporter gene activity in heterozygous embryos demonstrates that the gene is expressed differentially during embryogenesis, presumably directing dynamic changes in heparan sulfate structure. Moreover, mice homozygous for the Hs2st gene trap allele die in the neonatal period, exhibiting bilateral renal agenesis and defects of the eye and the skeleton. Analysis of kidney development in Hs2st mutants reveals that the gene is not required for two early events-ureteric bud outgrowth from the Wolffian duct and initial induction of Pax-2 expression in the metanephric mesenchyme. It is required, however, for mesenchymal condensation around the ureteric bud and initiation of branching morphogenesis. Because 2-O-sulfation has been shown to influence the functional interactions of ligands with heparan sulfate in vitro, we discuss the possibility that the Hs2st mutant phenotype is a consequence of compromised interactions between growth factors and their signal-transducing receptors. These data provide the first genetic evidence that the regulated synthesis of differentially glycosylated proteoglycans can affect morphogenesis during vertebrate development.