2,3,7,8-Tetrachlorodibenzo-p-dioxin (TCDD) dorsalizes the pattern of prostatic buds developing from the urogenital sinus (UGS) of male fetal mice, causing some buds to form in inappropriate positions while blocking formation of others. This teratogenic TCDD action significantly reduces prostate main duct number and causes ventral prostate agenesis in exposed males. The purpose of this study was to determine whether inhibition of fibroblast growth factor 10 (FGF10) signaling is mechanistically linked to mouse prostatic budding impairment by TCDD. In utero TCDD exposure induced aryl hydrocarbon receptor–responsive cytochrome P450 1b1 messenger RNA (mRNA) in ventral UGS regions where Fgf10 and fibroblast growth factor receptor 2 (Fgfr2) mRNA were expressed and where budding was most severely inhibited by TCDD. However, TCDD exposure did not reduce Fgf10 or Fgfr2 mRNA abundance in the UGS or alter their distribution. Addition of FGF10 protein to UGS organ culture media increased the abundance of UGS basal epithelial cells immunopositive for phosphorylated extracellular signal–regulated kinase (ERK). FGF10 also increased the number of 5-bromo-2′-deoxyuridine (BrdU)-labeled UGS epithelial cells and increased the number of prostatic buds formed per UGS. Addition of TCDD to UGS organ culture media did not alter FGF10-induced ERK activation in UGS basal epithelium but prevented FGF10-induced BrdU incorporation and blocked FGF10-induced prostatic bud formation. These results identify basal urogenital sinus epithelium cells as the key site of FGF10 action during fetal prostate development and suggest that TCDD likely acts downstream of FGFR2 and ERK to restrict UGS epithelial cell proliferation and prevent prostatic bud formation.