The urogenital and reproductive organs, including the external genitalia, bladder and urethra, develop as anatomically aligned organs. Descriptive and experimental embryology suggest that the cloaca, and its derivative, the urogenital sinus, contribute to the formation of these organs. However, it is unknown how the primary tissue lineages in, and adjacent to, the cloaca give rise to the above organs, nor is bladder formation understood. While it is known that sonic hedgehog (Shh) is expressed by the cloacal epithelia, the developmental programs that regulate and coordinate the formation of the urogenital and reproductive organs have not been elucidated. Here we report that Shh mutant embryos display hypoplasia of external genitalia, internal urethra (pelvic urethra) and bladder. The importance of Shh signaling in the development of bladder and external genitalia was confirmed by analyzing a variety of mutant mouse lines with defective hedgehog signaling. By genetically labeling hedgehog-responding tissue lineages adjacent to the cloaca and urogenital sinus, we defined the contribution of these tissues to the bladder and external genitalia. We discovered that development of smooth muscle myosin-positive embryonic bladder mesenchyme requires Shh signaling, and that the bladder mesenchyme and dorsal (upper) external genitalia derive from Shh-responsive peri-cloacal mesenchyme. Thus, the mesenchymal precursors for multiple urogenital structures derive from peri-cloacal mesenchyme and the coordination of urogenital organ formation from these precursors is orchestrated by Shh signals.