Formation of a mature thymic epithelial microenvironment is an essential prerequisite for the generation of a functionally competent T cell pool. It is likely that recently identified thymic epithelial precursors undergo phases of proliferation and differentiation to generate mature cortical and medullary thymic microenvironments. The mechanisms regulating development of immature thymic epithelial cells are unknown. Here we provide evidence that expansion of embryonic thymic epithelium is regulated by the continued presence of mesenchyme. In particular, mesenchymal cells are shown to mediate thymic epithelial cell proliferation through their provision of fibroblast growth factors 7 and 10. In contrast, differentiation of immature thymic epithelial cells, including acquisition of markers of mature cortical and medullary epithelium, occurs in the absence of ongoing mesenchymal support. Collectively, our data define a role for mesenchymal cells in thymus development, and indicate distinct mechanisms regulate proliferation and differentiation of immature thymic epithelial cells. In addition, our findings may aid in studies aimed at developing strategies to enhance thymus reconstitution and functioning in clinical certain contexts where thymic epithelial cell function is perturbed.