Early seedling development in plants depends on the biogenesis of chloroplasts from proplastids, accompanied by the formation of thylakoid membranes. An Arabidopsis thaliana gene, AtTerC, whose gene product shares sequence similarity with bacterial tellurite resistance C (TerC), is shown to be involved in a critical step required for the normal organization of prothylakoids and transition into mature thylakoid stacks. The AtTerC gene encodes an integral membrane protein, which contains eight putative transmembrane helices, localized in the thylakoid of the chloroplast, as shown by localization of an AtTerC–GFP fusion product in protoplasts and by immunoblot analysis of subfractions of chloroplasts. T-DNA insertional mutation of AtTerC resulted in a pigment-deficient and seedling-lethal phenotype under normal light conditions. Transmission electron microscopic analysis revealed that mutant etioplasts had normal prolamellar bodies (PLBs), although the prothylakoids had ring-like shapes surrounding the PLBs. In addition, the ultrastructures of mutant chloroplasts lacked thylakoids, did not have grana stacks, and showed numerous globular structures of varying sizes. Also, the accumulation of thylakoid membrane proteins was severely defective in this mutant. These results suggest that the AtTerC protein plays a crucial role in prothylakoid membrane biogenesis and thylakoid formation in early chloroplast development.