The transcriptional basis of vertebrate limb initiation, which is a well-studied system for the initiation of organogenesis, remains elusive. Specifically, involvement of the β-catenin pathway in limb initiation, as well as its role in hindlimb-specific transcriptional regulation, are under debate. Here, we show that the β-catenin pathway is active in the limb-forming area in mouse embryos. Furthermore, conditional inactivation of β-catenin as well as Islet1, a hindlimb-specific factor, in the lateral plate mesoderm results in a failure to induce hindlimb outgrowth. We further show that Islet1 is required for the nuclear accumulation of β-catenin and hence for activation of the β-catenin pathway, and that the β-catenin pathway maintains Islet1 expression. These two factors influence each other and function upstream of active proliferation of hindlimb progenitors in the lateral plate mesoderm and the expression of a common factor, Fgf10. Our data demonstrate that Islet1 and β-catenin regulate outgrowth and Fgf10-Fgf8 feedback loop formation during vertebrate hindlimb initiation. Our study identifies Islet1 as a hindlimb-specific transcriptional regulator of initiation, and clarifies the controversy regarding the requirement of β-catenin for limb initiation.