The basic biochemical mechanisms underlying many heritable human polycystic diseases are unknown despite evidence that most cases are caused by mutations in members of several protein families, the most prominent being the polycystin gene family, whose products are found on the primary cilia, or due to mutations in posttranslational processing and transport. Inherited polycystic kidney disease, the most prevalent polycystic disease, currently affects approximately 500,000 people in the United States. Decreases in proteoglycans (PGs) have been found in tissues and cultured cells from patients who suffer from autosomal dominant polycystic kidney disease, and this PG decrease has been hypothesized to be responsible for cystogenesis. This is possible because alterations in PG concentrations would be predicted to disrupt many homeostatic mechanisms of growth, development, and metabolism. To test this hypothesis, we have generated mice lacking xylosyltransferase 2 (XylT2), an enzyme involved in PG biosynthesis. Here we show that inactivation of XylT2 results in a substantial reduction in PGs and a phenotype characteristic of many aspects of polycystic liver and kidney disease, including biliary epithelial cysts, renal tubule dilation, organ fibrosis, and basement membrane abnormalities. Our findings demonstrate that alterations in PG concentrations can occur due to loss of XylT2, and that reduced PGs can induce cyst development.