The gene lunatic fringe encodes a secreted factor with significant sequence similarity to the Drosophila gene fringe. fringe has been proposed to function as a boundary-specific signalling molecule in the wing imaginal disc, where it is required to localize signalling activity by the protein Notch to the presumptive wing margin. By targeted disruption in mouse embryos, we show here that lunatic fringe is likewise required for boundary formation. lunatic fringe mutants fail to form boundaries between individual somites, the initial segmental unit of the vertebrate trunk. In addition, the normal alternating rostral-caudal pattern of the somitic mesoderm is disrupted, suggesting that intersomitic boundary formation and rostral-caudal patterning of somites are mechanistically linked by a process that requires lunatic fringe activity. As a result, the derivatives of the somitic mesoderm, especially the axial skeleton, are severely disorganized in lunatic fringe mutants. Taken together, our results demonstrate an essential function for a vertebrate fringe homologue and suggest a model in which lunatic fringe modulates Notch signalling in the segmental plate to regulate somitogenesis and rostral-caudal patterning of somites simultaneously.