BACKGROUND: Congenital diseases of the urinary tract are frequently observed in infants. Such diseases present a number of developmental anomalies such as hydroureter and hydronephrosis. Although some genetically-modified mouse models of growth factor signaling genes reproduce urinary phenotypes, the pathogenic mechanisms remain obscure. Previous studies suggest that a portion of the cells in the external genitalia and bladder are derived from peri-cloacal mesenchymal cells that receive Hedgehog (Hh) signaling in the early developmental stages. We hypothesized that defects in such progenitor cells, which give rise to urinary tract tissues, may be a cause of such diseases. METHODOLOGY/PRINCIPAL FINDINGS: To elucidate the pathogenic mechanisms of upper urinary tract malformations, we analyzed a series of Sonic hedgehog (Shh) deficient mice. Shh(-/-) displayed hydroureter and hydronephrosis phenotypes and reduced expression of several developmental markers. In addition, we suggested that Shh modulation at an early embryonic stage is responsible for such phenotypes by analyzing the Shh conditional mutants. Tissue contribution assays of Hh-responsive cells revealed that peri-cloacal mesenchymal cells, which received Hh signal secreted from cloacal epithelium, could contribute to the ureteral mesenchyme. Gain- and loss-of-functional mutants for Hh signaling revealed a correlation between Hh signaling and Bone morphogenetic protein (Bmp) signaling. Finally, a conditional ablation of Bmp receptor type IA (BmprIA) gene was examined in Hh-responsive cell lineages. This system thus made it possible to analyze the primary functions of the growth factor signaling relay. The defective Hh-to-Bmp signaling relay resulted in severe urinary tract phenotypes with a decrease in the number of Hh-responsive cells. CONCLUSIONS/SIGNIFICANCE: This study identified the essential embryonic stages for the pathogenesis of urinary tract phenotypes. These results suggested that Hh-responsive mesenchymal Bmp signaling maintains the population of peri-cloacal mesenchyme cells, which is essential for the development of the ureter and the upper urinary tract.