Investigation of the developmental fates of cells in the endodermal layer of the early bud stage mouse embryo revealed a regionalized pattern of distribution of the progenitor cells of the yolk sac endoderm and the embryonic gut. By tracing the site of origin of cells that are allocated to specific regions of the embryonic gut, it was found that by late gastrulation, the respective endodermal progenitors are already spatially organized in anticipation of the prospective mediolateral and anterior-posterior destinations. The fate-mapping data further showed that the endoderm in the embryonic compartment of the early bud stage gastrula still contains cells that will colonize the anterior and lateral parts of the extraembryonic yolk sac. In the Lhx1(Lim1)-null mutant embryo, the progenitors of the embryonic gut are confined to the posterior part of the endoderm. In particular, the prospective anterior endoderm was sequestered to a much smaller distal domain, suggesting that there may be fewer progenitor cells for the anterior gut that is poorly formed in the mutant embryo. The deficiency of gut endoderm is not caused by any restriction in endodermal potency of the mutant epiblast cells but more likely the inadequate allocation of the definitive endoderm. The inefficient movement of the anterior endoderm, and the abnormal differentiation highlighted by the lack of Sox17 and Foxa2 expression, may underpin the malformation of the head of Lhx1 mutant embryos.