Classical research has suggested that early palate formation develops via epithelial-mesenchymal interactions, and in this study we reveal which signals control this process. Using Fgf10–/–, FGF receptor 2b–/– (Fgfr2b–/–), and Sonic hedgehog (Shh) mutant mice, which all exhibit cleft palate, we show that Shh is a downstream target of Fgf10/Fgfr2b signaling. Our results demonstrate that mesenchymal Fgf10 regulates the epithelial expression of Shh, which in turn signals back to the mesenchyme. This was confirmed by demonstrating that cell proliferation is decreased not only in the palatal epithelium but also in the mesenchyme of Fgfr2b–/– mice. These results reveal a new role for Fgf signaling in mammalian palate development. We show that coordinated epithelial-mesenchymal interactions are essential during the initial stages of palate development and require an Fgf-Shh signaling network.