The patterned array of basal, intermediate and superficial cells in the urothelium of the mature ureter arises from uncommitted epithelial progenitors of the distal ureteric bud. Urothelial development requires signaling input from surrounding mesenchymal cells, which, in turn, depend on cues from the epithelial primordium to form a layered fibro-muscular wall. Here, we have identified FGFR2 as a crucial component in this reciprocal signaling crosstalk in the murine ureter. Loss of Fgfr2 in the ureteric epithelium led to reduced proliferation, stratification, intermediate and basal cell differentiation in this tissue, and affected cell survival and smooth muscle cell differentiation in the surrounding mesenchyme. Loss of Fgfr2 impacted negatively on epithelial expression of Shh and its mesenchymal effector gene Bmp4. Activation of SHH or BMP4 signaling largely rescued the cellular defects of mutant ureters in explant cultures. Conversely, inhibition of SHH or BMP signaling in wild-type ureters recapitulated the mutant phenotype in a dose-dependent manner. Our study suggests that FGF signals from the mesenchyme enhance, via epithelial FGFR2, the SHH-BMP4 signaling axis to drive urothelial and mesenchymal development in the early ureter.