Heterozygous loss of Bmp4 results both in humans and mice in severe malformation of the urinary tract. These defects have at least partially been attributed to loss of expression of Bmp4 in the ureteric mesenchyme, yet the cellular and molecular function of this signal as well as its effector pathways in this tissue have remained incompletely resolved. Here, we show that mice with a conditional deletion of Bmp4 in the ureteric mesenchyme exhibited hydroureter and hydronephrosis at newborn stages due to functional and physical ureter obstruction. Proliferation in both the mesenchymal and epithelial progenitor pools was severely reduced and smooth muscle cell and urothelial differentiation programs were not activated. Epithelial expression of P-ERK1/2, P-AKT and P-P38, and mesenchymal expression of P-SMAD1/5/9, P-P38 and P-AKT were abrogated. Pharmacological inhibition and activation experiments in ureter cultures defined AKT as the most relevant downstream effector for epithelial and mesenchymal proliferation as well as for epithelial differentiation. Epithelial proliferation and differentiation were also influenced by P-38 and ERK1/2, while SMAD signaling, together with AKT and P-38, were required for smooth muscle cell differentiation. Our analysis suggests that BMP4 is the signal that couples the proliferation and differentiation programs in the epithelial and mesenchymal tissue compartments of the developing ureter by different downstream effectors, most importantly AKT and SMAD.