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Dissociation of medial-edge epithelium (MEE) during palate development is essential for mediating correct craniofacial morphogenesis. This phenomenon is initiated by TGFβ3 upon adherence of opposing palatal shelves, because loss of E-cadherin causes the MEE seam to break into small epithelial islands. To investigate the molecular mechanisms that cause this E-cadherin loss, we isolated and cultured murine embryonic primary MEE cells from adhered or non-adhered palates. Here, we provide the first evidence that lymphoid enhancer factor 1 (LEF1), when functionally activated by phosphorylated Smad2 (Smad2- P) and Smad4 (rather than β-catenin), binds with the promoter of the E-cadherin gene to repress its transcription in response to TGFβ3 signaling. Furthermore, we found that TGFβ3 signaling stimulates epithelial-mesenchymal transformation (EMT) and cell migration in these cells. LEF1 and Smad4 were found to be necessary for up-regulation of the mesenchymal markers vimentin and fibronectin, independently of β- catenin. We proved that TGFβ3 signaling induces EMT in MEE cells by forming activated transcription complexes of Smad2-P, Smad4 and LEF1 that directly inhibit Ecadherin gene expression.