Formation of prostatic buds from the urogenital sinus (UGS) to initiate prostate development requires localized action of several morphogenetic factors. This report reveals all-trans-retinoic acid (RA) to be a powerful inducer of mouse prostatic budding that is associated with reciprocal changes in expression of two regulators of budding: sonic hedgehog (Shh) and bone morphogenetic protein 4 (Bmp4). Localization of retinoid signaling and expression of RA synthesis, metabolism and receptor genes in the UGS on embryonic days 14.5-17.5 implicate RA in the mechanism of bud initiation. In UGS organ culture, RA increased prostatic budding, increased Shh expression, and decreased Bmp4. Prostatic budding was stimulated in the absence of RA by recombinant SHH, by blocking BMP4 signaling with NOGGIN, or by combined treatment with SHH and NOGGIN in UGS organ culture media. These observations suggest that reciprocal changes in hedgehog and BMP signaling by RA may regulate bud initiation.