The diaphragm is an essential mammalian skeletal muscle, and defects in diaphragm development are the cause of congenital diaphragmatic hernias (CDHs), a common and often lethal birth defect. The diaphragm is derived from multiple embryonic sources, but how these give rise to the diaphragm is unknown, and, despite the identification of many CDH-associated genes, the etiology of CDH is incompletely understood. Using mouse genetics, we show that the pleuroperitoneal folds (PPFs), which are transient embryonic structures, are the source of the diaphragm's muscle connective tissue and regulate muscle development, and we show that the striking migration of PPF cells controls diaphragm morphogenesis. Furthermore, Gata4 mosaic mutations in PPF-derived muscle connective tissue fibroblasts result in the development of localized amuscular regions that are biomechanically weaker and more compliant, leading to CDH. Thus, the PPFs and muscle connective tissue are critical for diaphragm development, and mutations in PPF-derived fibroblasts are a source of CDH.