To understand the role Fgf signalling in skin and hair follicle development, we analysed the phenotype of mice deficient for Fgfr2-IIIb and its main ligand Fgf10. These studies showed that the severe epidermal hypoplasia found in mice null for Fgfr2-IIIb is caused by a lack of the basal cell proliferation that normally results in a stratified epidermis. Although at term the epidermis of Fgfr2-IIIb null mice is only two to three cells thick, it expresses the classical markers of epidermal differentiation and establishes a functional barrier. Mice deficient for Fgf10 display a similar but less severe epidermal hypoplasia. By contrast, Fgfr2-IIIb-/-, but not Fgf10-/-, mice produced significantly fewer hair follicles, and their follicles were developmentally retarded. Following transplantation onto nude mice, grafts of Fgfr2-IIIb-/- skin showed impaired hair formation, with a decrease in hair density and the production of abnormal pelage hairs. Expression of Lef1, Shh and Bmp4 in the developing hair follicles of Fgfr2-IIIb-/- mice was similar to wild type. These results suggest that Fgf signalling positively regulates the number of keratinocytes needed to form a normal stratified epidermis and to initiate hair placode formation. In addition, Fgf signals are required for the growth and patterning of pelage hairs.