The inactivation of the Hnf1β gene identified an essential role in epithelial differentiation of the visceral endoderm and resulted in early embryonic death. In the present study, we have specifically inactivated this gene in hepatocytes and bile duct cells using the Cre/loxP system. Mutant animals exhibited severe jaundice caused by abnormalities of the gallbladder and intrahepatic bile ducts (IHBD). The paucity of small IHBD was linked to a failure in the organization of duct structures during liver organogenesis, suggesting an essential function of Hnf1b in bile duct morphogenesis. Mutant mice also lacked interlobular arteries. As HNF1β is not expressed in these cells, it further emphasizes the link between arterial and biliary formation. Hepatocyte metabolism was also affected and we identified hepatocyte-specific HNF1β target genes involved in bile acids sensing and in fatty acid oxidation.