Proximal-distal outgrowth of the vertebrate limb bud is regulated by the apical ectodermal ridge (AER), which forms at an invariant position along the dorsal-ventral (D/V) axis of the embryo. We have studied the genetic and cellular events that regulate AER formation in the mouse. In contrast to implications from previous studies in chick, we identified two distinct lineage boundaries in mouse ectoderm prior to limb bud outgrowth using a Cre/loxP-based fate-mapping approach and a novel retroviral cell-labeling technique. One border is transient and at the limit of expression of the ventral gene En1, which corresponds to the D/V midline of the AER, and the second border corresponds to the dorsal AER margin. Labeling of AER precursors using an inducible Cre showed that not all cells that initially express AER genes form the AER, indicating that signaling is required to maintain an AER phenotype. Misexpression of En1 at moderate levels specifically in the dorsal AER of transgenic mice was found to produce dorsally shifted AER fragments, whereas high levels of En1 abolished AER formation. In both cases, the dorsal gene Wnt7a was repressed in cells adjacent to the En1-expressing cells, demonstrating that signaling regulated by EN1 occurs across the D/V border. Finally, fate mapping of AER domains in these mutants showed that En1 plays a part in positioning and maintaining the two lineage borders.