Obstruction of the ureteropelvic junction (UPJ) is a common congenital anomaly frequently associated with ureteral defects. To study the molecular mechanisms that modulate ureteral development, we inactivated Smad4, the common Smad critical for transcriptional responses to TGF-β and Bmp signaling, in the ureteral and bladder mesenchyme during embryogenesis. Loss of canonical Smad signaling in these tissues caused bilateral UPJ obstruction and severe hydronephrosis beginning at embryonic day 17.5. Despite a reduction in quantity of ureteral smooth muscle, differentiation proceeded without Smad4, producing a less severe phenotype than Bmp4 mutants; this finding suggests that at least some Bmp4 functions in ureteral smooth muscle may be Smad-independent. The absence of canonical Smad signaling in the ureteral mesenchyme, but not in the urothelium itself, led to urothelial disorganization, highlighting the importance of mesenchymal support for epithelial development. Transcript profiling revealed altered expression in known Bmp targets, smooth muscle-specific genes, and extracellular matrix-related genes in mutant ureters before the onset of hydronephrosis. Expression of the Bmp target Id2 was significantly lower in Smad4 mutants, consistent with the observation that Id2 mutants develop UPJ obstruction. In summary, Smad4 deficiency reduces the number and contractility of ureteral smooth muscle cells, leading to abnormal pyeloureteral peristalsis and functional obstruction. The subsequent bending and luminal constriction of the ureter at the UPJ marks the transition from a functional obstruction to a more intractable physical obstruction, suggesting that early intervention for this disease may prevent more irreversible damage to the urinary tract.