Development of the metanephric kidney involves the establishment of discrete zones of induction and differentiation that are crucial to the future radial patterning of the organ. Genetic deletion of the forkhead transcription factor, Foxd1, results in striking renal abnormalities, including the loss of these discrete zones and pelvic fused kidneys. We have investigated the molecular and cellular basis of the kidney phenotypes displayed by Foxd1-null embryos and report here that they are likely to be caused by a failure in the correct formation of the renal capsule. Unlike the single layer of Foxd1-positive stroma that comprises the normal renal capsule, the mutant capsule contains heterogeneous layers of cells, including Bmp4-expressing cells, which induce ectopic phospho-Smad1 signaling in nephron progenitors. This missignaling disrupts their early patterning, which, in turn, causes mispatterning of the ureteric tree, while delaying and disorganizing nephrogenesis. In addition, the defects in capsule formation prevent the kidneys from detaching from the body wall, thus explaining their fusion and pelvic location. For the first time, functions have been ascribed to the renal capsule that include delineation of the organ and acting as a barrier to inappropriate exogenous signals, while providing a source of endogenous signals that are crucial to the establishment of the correct zones of induction and differentiation.