Normal patterning of the developing limb requires a tight restriction of Sonic hedgehog (Shh) mRNA to the posterior margin of the limb bud. While several positive and negative regulatory factors have been identified which serve to position the Shh expression domain in the distal posterior limb, these factors cannot in themselves explain the tight restriction of Shh to the posterior margin, nor can they explain the similarly tight restriction of Shh to the anterior margin when the regulatory factors are disrupted or misexpressed. We suggest that the transcription factors Tbx2 and Tbx3 are excellent candidates for positively-acting factors responsible for limiting Shh expression to the margins of the limb bud. These closely related factors are indeed expressed at the anterior and posterior limb margins over a wide range of limb bud stages. Moreover, previous reports indicate that in addition, misexpression of Tbx2 beyond the limb margin is sufficient to anteriorly expand Shh, and conversely, antagonizing Tbx2 function leads to loss of Shh. In contrast to this idea, previous models have placed Tbx2 expression downstream of Shh and Bone Morphogenetic Protein (BMP) signaling. We find, however, that Tbx2 expression is neither affected by blocking Shh signaling with cyclopamine nor by genetic removal of several BMP activities in the limb bud. To understand the true source of the positional information responsible for limiting Tbx2, Tbx3 and Shh expression to the marginal mesenchyme of the limb bud, we undertook a series of grafting and extirpation experiments, which led to the identification of the dorsal-ventral (DV) border ectoderm exclusive of the apical ectodermal ridge (AER) as a new signaling center in the limb bud. We find that maintenance of Tbx2 expression in the limb mesoderm requires proximity to the non-AER D-V border. Using chick-quail graft chimeras, we find that a graft of the non-AER D-V border ectoderm to a location on the surface of the middle of the limb bud is sufficient to induce ectopic expression of Tbx2 in underlying mesoderm. These data demonstrate that the non-AER D-V border ectoderm is necessary and sufficient for Tbx2 expression at the anterior and posterior limb margins. Similarly, we find that a graft of the non-AER D-V border can expand the domain of Shh anteriorly when grafted just anterior to the ZPA. It is notable that Tbx2 expression does not extend distally to the mesoderm underlying the AER. Moreover, we find that grafts of the AER to more proximal locations result in downregulation of Tbx2 expression, suggesting that the AER produces a negatively-acting signal opposing the activity of the non-AER DV border ectoderm. Indeed, implantation of beads soaked in fibroblast growth factor 8 (Fgf8), expressed in the AER, downregulates Tbx2 expression. The data presented here identify the non-AER border of dorsal-ventral ectoderm as a new signaling center in limb development that localizes the ZPA to the limb margin. This finding explains the tight restriction of Shh expression to the posterior margin throughout limb outgrowth as well as the tight restriction of Shh expression to the anterior margin in many mutants exhibiting preaxial polydactyly.