Proper limb growth and patterning requires signals from the zone of polarizing activity in the posterior mesoderm and from the overlying apical ectodermal ridge (AER). Sonic hedgehog and Fgf-4, respectively, have recently been identified as candidates for these signals. We have dissected the roles of these secreted proteins in early limb development by ectopically regulating their activities in a number of surgical contexts. Our results indicate that Sonic hedgehog initiates expression of secondary signaling molecules, including Bmp-2 in the mesoderm and Fgf-4 in the ectoderm. The mesoderm requires ectodermally derived competence factors, which include Fgf-4, to activate target gene expression in response to Sonic hedgehog. The expression of Sonic hedgehog and Fgf-4 is coordinately regulated by a positive feedback loop operating between the posterior mesoderm and the overlying AER. Taken together, these data provide a basis for understanding the integration of growth and patterning in the developing limb.