The mammalian urogenital system derives from multipotent progenitor cells of different germinal tissues. The contribution of individual sub-populations to specific components of the mature system, and the spatiotemporal restriction of the respective lineages have remained poorly characterized. Here, we use comparative expression analysis to delineate sub-regions within the developing urogenital system that express the T-box transcription factor gene Tbx18. We show that Tbx18 is transiently expressed in the epithelial lining and the subjacent mesenchyme of the urogenital ridge. At the onset of metanephric development Tbx18 expression occurs in a band of mesenchyme in between the metanephros and the Wolffian duct but is subsequently restricted to the mesenchyme surrounding the distal ureter stalk. Genetic lineage tracing reveals that former Tbx18(+) cells of the urogenital ridge and the metanephric field contribute substantially to the adrenal glands and gonads, to the kidney stroma, the ureteric and the bladder mesenchyme. Loss of Tbx18 does not affect differentiation of the adrenal gland, the gonad, the bladder and the kidney. However, ureter differentiation is severely disturbed as the mesenchymal lineage adopts a stromal rather than a ureteric smooth muscle fate. DiI labeling and tissue recombination experiments show that the restriction of Tbx18 expression to the prospective ureteric mesenchyme does not reflect an active condensation process but is due to a specific loss of Tbx18 expression in the mesenchyme out of range of signals from the ureteric epithelium. These cells either contribute to the renal stroma or undergo apoptosis aiding in severing the ureter from its surrounding tissues. We show that Tbx18-deficient cells do not respond to epithelial signals suggesting that Tbx18 is required to prepattern the ureteric mesenchyme. Our study provides new insights into the molecular diversity of urogenital progenitor cells and helps to understand the specification of the ureteric mesenchymal sub-lineage.