The first step in the development of human colorectal cancer is aberrant activation of the Wnt signaling pathway. Wnt signaling hyperactivation is predominantly caused by loss-of-function mutations in the adenomatous polyposis coli (APC) gene that encodes the pathway negative regulator. In order to identify genes affected by the Apc loss, we performed expression profiling of intestinal epithelium isolated from mice harboring a conditional Apc allele. The gene encoding transcriptional factor msh homeobox 1 (Msx1) displayed robust upregulation upon Apc inactivation. Histological analysis of the Apc-deficient epithelium revealed that in the small intestine, the Msx1 protein was localized exclusively in ectopic crypts, i.e., in pockets of proliferating cells abnormally positioned on the villi. Ablation of the Msx1 gene leads to the disappearance of ectopic crypts and loss of differentiated cells. Moreover, tumors arising from Msx1-deficient cells display altered morphology reminiscent of villous adenomas. In human tumor specimens, MSX1 displayed significantly increased expression in colonic neoplasia with a descending tendency during the lesion progression towards colorectal carcinoma. In summary, the results indicate that Msx1 represents a novel marker of intestinal tumorigenesis. In addition, we described the previously unknown relationship between the Msx1-dependent formation of ectopic crypts and cell differentiation.