Steroid hormone-regulated differentiation of uterine stromal cells, known as decidualization, is essential for embryo implantation. The role of the estrogen receptor-α (ESR1) during this differentiation process is unclear. Development of conditional Esr1-null mice showed that deletion of this gene in both epithelial and stromal compartments of the uterus leads to a complete blockade of decidualization, indicating a critical role of ESR1 during this process. To further elucidate the cell type-specific function of ESR1 in the uterus, we created WE(d/d) mice in which Esr1 is ablated in uterine luminal and glandular epithelia but is retained in the stroma. Uteri of WE(d/d) mice failed to undergo decidualization, indicating that epithelial ESR1 contributes to stromal differentiation via a paracrine mechanism. We noted markedly reduced production of the leukemia inhibitory factor (LIF) in WE(d/d) uteri. Supplementation with LIF restored decidualization in WE(d/d) mice. Our study indicated that LIF acts synergistically with progesterone to induce the expression of Indian hedgehog (IHH) in uterine epithelium and its receptor patched homolog 1 in the stroma. IHH then induces the expression of chicken ovalbumin upstream promoter-transcription factor II, a transcription factor that promotes stromal differentiation. To address the mechanism by which LIF induces IHH expression, we used mice lacking uterine epithelial signal transducer and activator of transcription 3, a well-known mediator of LIF signaling. Our study revealed that LIF-mediated induction of IHH occurs without the activation of epithelial signal transducer and activator of transcription 3 but uses an alternate pathway involving the activation of the ERK1/2 kinase. Collectively our results provide unique insights into the paracrine mechanisms by which ESR1 directs epithelial-stromal dialogue during pregnancy establishment.