Heparan sulfate proteoglycans (HSPGs) are central modulators of developmental processes likely through their interaction with growth factors, such as GDNF, members of the FGF and TGFβ superfamilies, EGF receptor ligands and HGF. Absence of the biosynthetic enzyme, heparan sulfate 2-O-sulfotransferase (Hs2st) leads to kidney agenesis. Using a novel combination of in vivo and in vitro approaches, we have reanalyzed the defect in morphogenesis of the Hs2st−/− kidney. We observed that, while the ureteric bud (UB) forms from all Hs2st−/− Wolffian ducts, about two-thirds do not branch at all, and the remainder stop after the first branching event. Utilizing assays that separately model distinct stages of kidney branching morphogenesis, we found that the Hs2st−/− UB is able to undergo branching and induce mesenchymal-to-epithelial transformation when recombined with control MM, and the isolated Hs2st null UB is able to undergo branching morphogenesis in the presence of exogenous soluble pro-branching growth factors when embedded in an extracellular matrix, indicating that the UB is competent in and of itself. This is in contrast to the prevailing view that the defect underlying the renal agenesis phenotype is due to a primary role for 2-O sulfated HS in UB branching. Unexpectedly, the mutant MM was also fully capable of being induced in recombination experiments with wild-type tissue. Thus, both the mutant UB and mutant MM tissue appear competent in and of themselves, but the combination of mutant tissues fails in vivo and, as we show, in organ culture. We hypothesized a 2OS-dependent defect in the mutual inductive process, which could be on either the UB or MM side, since both progenitor tissues express Hs2st. In light of these observations, we specifically examined the role of the HS 2-O sulfation modification on the morphogenetic capacity of the UB and MM individually. We demonstrate that early UB branching morphogenesis is not primarily modulated by factors that depend on the HS 2-O sulfate modification; however, factors that contribute to MM induction are markedly sensitive to the 2-O sulfation modification. This data suggests that key defect in Hs2st null kidneys is the inability of MM to undergo induction either through a failure of mutual induction or a primary failure of MM morphogenesis. This results in normal UB formation but affects either T-shaped UB formation or iterative branching of the T-shaped UB (possibly two separate stages in collecting system development dependent upon HS). This appears to be the first example of a defect in the MM preventing advancement of early UB branching past the first bifurcation stage, one of the limiting steps in early kidney development.