Tissue-tissue interactions between the cardiogenic mesoderm and endoderm induce liver development while suppressing the pancreas. The homeoprotein Pdx1 promotes pancreatic development, but is repressed by Shh signaling from the surrounding mesoderm. The liver bud develops from the foregut endoderm and expands into the surrounding mesenchyme, forming connections to surrounding structures. Pancreatic development begins with dorsal and ventral buds expressing Pdx1, which later fuse to form the pancreas.