During pancreatic organogenesis endocrine cells arise from non self-renewing progenitors that express Ngn3. The precursors that give rise to Ngn3⁺ cells are presumably located within duct-like structures. However, the nature of such precursors is poorly understood. We show that, at E13–E18, the embryonic stage during which the major burst of β-cell neogenesis takes place, pancreatic duct cells express Hnf1β, the product of the maturity-onset diabetes of the young type 5 (MODY5) gene. Ngn3⁺ cells at this stage invariably cluster with mitotically competent Hnf1β⁺ cells, and are often intercalated with these cells in the epithelium that lines the lumen of primitive ducts. We present several observations that collectively indicate that Hnf1β⁺ cells are the immediate precursors of Ngn3⁺ cells. We furthermore show that Hnf1β expression is markedly reduced in early pancreatic epithelial cells of Hnf6-deficient mice, in which formation of Ngn3⁺ cells is defective. These findings define a precursor cellular stage of the embryonic pancreas and place Hnf1β in a genetic hierarchy that regulates the generation of pancreatic endocrine cells.