Keratinocyte growth factor, (KGF), a member of the fibroblast growth factor (FGF) family, is involved in wound healing. It also promotes the differentiation of many epithelial tissues and proliferation of epithelial cells as well as pancreatic duct cells. Additionally, many members of the highly homologous FGF family (including KGF), influence both growth and cellular morphology in the developing embryo. We have previously observed elevated levels of KGF in our interferon-gamma transgenic mouse model of pancreatic regeneration. To understand the role of KGF in pancreatic differentiation, we generated insulin promoter-regulated KGF transgenic mice. Remarkably, we have found that ectopic KGF expression resulted in the emergence of hepatocytes within the islets of Langerhans in the pancreas. Additionally, significant intra-islet duct cell proliferation in the pancreata of transgenic KGF mice was observed. The unexpected appearance of hepatocytes and proliferation of intra-islet duct cells in the pancreata of these mice evidently stemmed directly from local exposure to KGF.