Disruption of cell polarity is seen in many cancers; however, it is generally considered a late event in tumor progression. Lethal giant larvae (Lgl) has been implicated in maintenance of cell polarity in Drosophila and cultured mammalian cells. We now show that loss of Lgl1 in mice results in formation of neuroepithelial rosette-like structures, similar to the neuroblastic rosettes in human primitive neuroectodermal tumors. The newborn Lgl1(-/-) pups develop severe hydrocephalus and die neonatally. A large proportion of Lgl1(-/-) neural progenitor cells fail to exit the cell cycle and differentiate, and, instead, continue to proliferate and die by apoptosis. Dividing Lgl1(-/-) cells are unable to asymmetrically localize the Notch inhibitor Numb, and the resulting failure of asymmetric cell divisions may be responsible for the hyperproliferation and the lack of differentiation. These results reveal a critical role for mammalian Lgl1 in regulating of proliferation, differentiation, and tissue organization and demonstrate a potential causative role of disruption of cell polarity in neoplastic transformation of neuroepithelial cells.