Heterozygosity for the mouse lethal yellow (Ay) mutation leads to obesity, increased tumor susceptibility and increased activity of the agouti coat color gene; homozygosity for Ay results in embryonic death around the time of implantation. Although these pleiotropic effects have not been separated by recombination, previous studies have suggested that the dominant and recessive effects result from distinct genetic lesions. Here we use a combination of genomic and cDNA cloning experiments to demonstrate that the Ay mutation is caused by a 120 kb deletion which lies centromere-proximal to the agouti coat color gene. The deletion removes coding but not 5′ untranslated sequences for a ubiquitously expressed gene predicted to encode a protein similar in sequence to an RNA-binding protein, which we named Merc, for maternally expressed hnRNP C-related gene, but have renamed Raly, since the gene is nearly identical to one reported recently by Michaud et al. (Gene Dev. 7, 1203–1213, 1993). The Ay deletion results in the splicing of Merc/Raly 5′ untranslated sequences to agouti protein-coding sequences, which suggests that ectopic expression of the normal agouti protein by the Ay fusion RNA is responsible for the pleiotropic effects associated with heterozygosity for Ay. We find that Merc/Raly RNA is present in the unfertilized egg and is also transcribed in preimplantation embryos. Using a PCR-based assay to determine the genotype of individual embryos from an Ay/a × Ay/a intercross, we show that, in the absence of zygotic Merc/Raly expression, Ay/Ay embryos develop to the blastocyst stage, but do not hatch from the zona pellucida or form trophoblastic outgrowths. Injection of a Merc/Raly antisense oligonucleotide into non-mutant embryos blocks development prior to the blastocyst stage, and can be rescued by coinjection of a Merc/Raly transgene. These results suggest that maternal expression of Merc/Raly plays an important role in preimplantation development and that its deletion of is sufficient to explain Ay-associated embryonic lethality.