Smooth muscle differentiation is induced in the embryonic bladder by the centrally located urothelium in the undifferentiated mesenchyme in the periphery adjacent to the serosa. We hypothesize that under the appropriate signal the entire undifferentiated bladder mesenchyme is capable of smooth muscle differentiation and that the urothelium patterns fibromuscular development. Embryonic bladders of wild-type and Green Fluorescent Protein mice were separated into urothelial and mesenchymal components before smooth muscle differentiation (E12.5-E13). The urothelial layer green fluorescent protein was recombined and grafted with the mesenchyme (wild-type) in an orthotopic position, heterotopic position and ectopic position. In all cases, a zone of smooth muscle inhibition was observed adjacent to the epithelium whether the urothelium was in an orthotopic or heterotypic position. Bladder mesenchyme and bladder epithelium grafted alone did not grow. In conclusion, the full thickness of bladder mesenchyme is capable of smooth muscle differentiation dependent on the location of urothelium. These experiments support the hypothesis that urothelium secretes a diffusible factor that at high concentrations inhibits smooth muscle and at low concentrations induces smooth muscle, thus patterning mesenchymal cell differentiation across the full thickness of the fibromuscular bladder wall.