Epithelial-mesenchymal feedback signaling is the key to diverse organogenetic processes such as limb bud development and branching morphogenesis in kidney and lung rudiments. This study establishes that the BMP antagonist gremlin (Grem1) is essential to initiate these epithelial-mesenchymal signaling interactions during limb and metanephric kidney organogenesis. A Grem1 null mutation in the mouse generated by gene targeting causes neonatal lethality because of the lack of kidneys and lung septation defects. In early limb buds, mesenchymal Grem1 is required to establish a functional apical ectodermal ridge and the epithelial-mesenchymal feedback signaling that propagates the sonic hedgehog morphogen. Furthermore, Grem1-mediated BMP antagonism is essential to induce metanephric kidney development as initiation of ureter growth, branching and establishment of RET/GDNF feedback signaling are disrupted in Grem1-deficient embryos. As a consequence, the metanephric mesenchyme is eliminated by apoptosis, in the same way as the core mesenchymal cells of the limb bud.