Homologous recombination is employed to inactivate genes, particularly genes associated with MHC antigens. Particularly, the &bgr;2-microglobulin gene is inactivated for reducing or eliminating the expression of functional Class I MHC antigens. The resulting cells may be used as universal donor cells. In addition, embryonic stem cells may be modified by homologous recombination for use in producing chimeric or transgenic mammalian hosts, which may be used as source of universal donor organs, or as models for drug and transplantation therapies. Methods for homologous recombination in non-transformed mammalian somatic cells are also described.