The homeobox transcription factor Prox1 is critical to the development of many embryonic organs and tissues, although current understanding of its expression in the developing renal medulla is limited. We examined the functional role of Prox1 during mouse kidney development with particular emphasis on the developing loop of Henle. Our data show that Prox1 is expressed in the transdifferentiating region from the NKCC2-positive thick ascending limb, into the CLC-K1-positive ascending thin limb of Henle's loop beginning at embryonic day 18. From 1 to 14 days of age, Prox1-positive cells gradually disappeared from the papillary tip, and remained in the initial part of inner medulla after 21 days. In this transforming area, no Prox1 was observed in cells undergoing apoptosis but was expressed strongly in the remaining cells, which differentiated into ascending thin limb epithelial cells. In vitro and in vivo approaches showed that Prox1 expression increases where the osmolality is near optimal range, but decreases at below- or above-optimal ranges. Renal hypoosmolality induced by furosemide (NKCC2 inhibitor) inhibited Prox1 expression and delayed maturation of the ascending limb of Henle's loop. Together, these studies suggest that Prox1 appears to be a critical stage specific regulator of specifying ascending thin limb cell fate and that its expression is regulated by osmolality.