The formation of the palate involves the coordinated outgrowth, elevation and midline fusion of bilateral shelves leading to the separation of the oral and nasal cavities. Reciprocal signaling between adjacent fields of epithelial and mesenchymal cells directs palatal shelf growth and morphogenesis. Loss of function mutations in genes encoding FGF ligands and receptors have demonstrated a critical role for FGF signaling in mediating these epithelial-mesenchymal interactions. The Sprouty family of genes encode modulators of FGF signaling. We have established that mice carrying a deletion that removes the FGF signaling antagonist Spry2 have cleft palate. We show that excessive cell proliferation in the Spry2-deficient palate is accompanied by the abnormal progression of shape changes and movements required for medially directed shelf outgrowth and midline contact. Expression of the FGF responsive transcription factors Etv5, Msx1, and Barx1, as well as the morphogen Shh, is restricted to specific regions of the developing palate. We detected elevated and ectopic expression of these transcription factors and disorganized Shh expression in the Spry2-deficient palate. Mice carrying a targeted disruption of Spry2 fail to complement the craniofacial phenotype characterized in Spry2 deletion mice. Furthermore, a Spry2-BAC transgene rescues the palate defect. However, the BAC transgenic mouse lines express reduced levels of Spry2. The resulting hypomorphic phenotype demonstrates that palate development is Spry2 dosage sensitive. Our results demonstrate the importance of proper FGF signaling thresholds in regulation of epithelial-mesenchymal interactions and cellular responses necessary for coordinated morphogenesis of the face and palate.