Short bowel syndrome is an acquired condition in which the length of the small intestine is insufficient to perform its normal absorptive function. Current therapies are limited as the developmental mechanisms that normally regulate elongation of the small intestine are poorly understood. Here, we identify Fgf9 as an important epithelial-to-mesenchymal signal required for proper small intestinal morphogenesis. Mouse embryos that lack either Fgf9 or the mesenchymal receptors for Fgf9 contained a disproportionately shortened small intestine, decreased mesenchymal proliferation, premature differentiation of fibroblasts into myofibroblasts and significantly elevated Tgfbeta signaling. These findings suggest that Fgf9 normally functions to repress Tgfbeta signaling in these cells. In vivo, a small subset of mesenchymal cells expressed phospho-Erk and the secreted Tgfbeta inhibitors Fst and Fstl1 in an Fgf9-dependent fashion. The p-Erk/Fst/Fstl1-expressing cells were most consistent with intestinal mesenchymal stem cells (iMSCs). We found that isolated iMSCs expressed p-Erk, Fst and Fstl1, and could repress the differentiation of intestinal myofibroblasts in co-culture. These data suggest a model in which epithelial-derived Fgf9 stimulates iMSCs that in turn regulate underlying mesenchymal fibroblast proliferation and differentiation at least in part through inhibition of Tgfbeta signaling in the mesenchyme. Taken together, the interaction of FGF and TGFbeta signaling pathways in the intestinal mesenchyme could represent novel targets for future short bowel syndrome therapies.