It has been suggested that cell position regulates endodermal differentiation in mouse embryo inner cell masses and in aggregates of embryonal carcinoma (EC) cells. This hypothesis states that cells at the interface between the cell mass and blastocoel fluid or culture medium differentiate into endoderm, whereas internally located cells follow alternative developmental pathways. To test the cell position hypothesis, pluripotent PSA-1 cells were aggregated with hypoxanthine phosphoribosyltransferase-deficient, parietal-like, endodermal cells. The resulting aggregates consisted of cores of PSA-1 cells surrounded by endodermal cells. Autoradiography was used to distinguish between endodermal cells that were the products of EC cell differentiation and the exogenous endoderm. Alkaline phosphatase staining was used to distinguish EC cells from endodermal cells. As predicted by the cell position hypothesis, the PSA-1 EC cells, all of which were internally located, did not differentiate into endodermal cells. Nonspecific inhibition of differentiation did not account for the lack of PSA-1-derived endoderm since the PSA-1 cells in such aggregates did differentiate into columnar ectodermal-like cells. Similar experiments were also conducted with F9 cells. In this case, aggregation cultures contained retinoic acid to induce F9 cells to differentiate into visceral endoderm. In cultures containing F9 cells surrounded by parietal-like endodermal cells, no F9-derived endoderm was detected either autoradiographically or by assaying for alpha-fetoprotein production, a visceral endoderm marker. Thus, retinoic acid-induced endodermal differentiation was also regulated by cell position. Collectively, the above results provide strong evidence for the hypothesis that cell position regulates endodermal differentiation in aggregates of EC cells.