During vertebrate limb development, positional information must be specified along three distinct axes. Although much progress has been made in our understanding of the molecular interactions involved in anterior-posterior and proximal-distal limb patterning, less is known about dorsal-ventral patterning. The genes Wnt-7a and Lmx-1, which are expressed in dorsal limb ectoderm and mesoderm, respectively, are thought to be important regulators of dorsal limb differentiation. Whether a complementary set of molecules controls ventral limb development has not been clear. Here we report that Engrailed-1, a homeodomain-containing transcription factor expressed in embryonic ventral limb ectoderm, is essential for ventral limb patterning. Loss of Engrailed-1 function in mice results in dorsal transformations of ventral paw structures, and in subtle alterations along the proximal-distal limb axis. Engrailed-1 seems to act in part by repressing dorsal differentiation induced by Wnt-7a, and is essential for proper formation of the apical ectodermal ridge.