The differentiated cell types of the epithelial and mesenchymal tissue compartments of the mature ureter of the mouse arise in a precise temporal and spatial sequence from uncommitted precursor cells of the distal ureteric bud epithelium and its surrounding mesenchyme. Previous genetic efforts identified a member of the Hedgehog (HH) family of secreted proteins, Sonic hedgehog (SHH) as a crucial epithelial signal for growth and differentiation of the ureteric mesenchyme. Here, we used conditional loss- and gain-of-function experiments of the unique HH signal transducer Smoothened (SMO) to further characterize the cellular functions and unravel the effector genes of HH signaling in ureter development. We showed that HH signaling is not only required for proliferation and SMC differentiation of cells of the inner mesenchymal region but also for survival of cells of the outer mesenchymal region, and for epithelial proliferation and differentiation. We identified the Forkhead transcription factor gene Foxf1 as a target of HH signaling in the ureteric mesenchyme. Expression of a repressor version of FOXF1 in this tissue completely recapitulated the mesenchymal and epithelial proliferation and differentiation defects associated with loss of HH signaling while re-expression of a wildtype version of FOXF1 in the inner mesenchymal layer restored these cellular programs when HH signaling was inhibited. We further showed that expression of Bmp4 in the ureteric mesenchyme depends on HH signaling and Foxf1, and that exogenous BMP4 rescued cell proliferation and epithelial differentiation in ureters with abrogated HH signaling or FOXF1 function. We conclude that SHH uses a FOXF1-BMP4 module to coordinate the cellular programs for ureter elongation and differentiation, and suggest that deregulation of this signaling axis occurs in human congenital anomalies of the kidney and urinary tract (CAKUT).