Rhou encodes a Cdc42-related atypical Rho GTPase that influences actin organization in cultured cells. In mouse embryos at earlysomite to early-organogenesis stages, Rhou is expressed in the columnar endoderm epithelium lining the lateral and ventral wall of the anterior intestinal portal. During foregut development, Rhou is down regulated in regions where the epithelium acquires a multilayered morphology heralding the budding of organ primordia. In embryos generated from Rhou knockdown embryonic stem (ES) cells, the embryonic foregut displays an abnormally flattened shape. The epithelial architecture of the endoderm is disrupted, the cells are depleted of microvilli and the phalloidin-stained F-actin content of their sub-apical cortical domain is reduced. Rhou-deficient cells in ES cell-derived embryos and embryoid bodies are less efficient in endoderm differentiation. Impaired endoderm differentiation of Rhou-deficient ES cells is accompanied by reduced expression of c-Jun/AP-1 target genes, consistent with a role for Rhou in regulating JNK activity. Down regulation of Rhou in individual endoderm cells results in a reduced ability of these cells to occupy the apical territory of the epithelium. Our findings highlight epithelial morphogenesis as a required intermediate step in the differentiation of endoderm progenitors. In vivo, Rhou activity maintains the epithelial architecture of the endoderm progenitors, and its down regulation accompanies the transition of the columnar epithelium in the embryonic foregut to a multilayered cell sheet during organ formation.