During early limb development, distal tip ectoderm is induced by the underlying mesenchyme to form the apical ectodermal ridge. Subsequent limb growth and patterning depend on reciprocal signaling between the mesenchyme and ridge. Mice that are homozygous for mutations at the limb deformity (ld) locus do not form a proper ridge and the anteroposterior axis of the limb is shortened. Skeletal analyses reveal shortened limbs that involve loss and fusion of distal bones and digits, defects in both anteroposterior and proximodistal patterning. Using molecular markers and mouse-chick chimeras we examined the ridge-mesenchymal interactions to determine the origin of the ld patterning defects. In the ld ridge, fibroblast growth factor 8 (Fgf8) RNA is decreased and Fgf4 RNA is not detected. In the ld mesenchyme, Sonic hedgehog (Shh), Evx1 and Wnt5a expression is decreased. In chimeras between ld ectoderm and wild-type mesenchyme, a ridge of normal morphology and function is restored, Fgf8 and Shh are expressed normally, Fgf4 is induced and a normal skeletal pattern arises. These results suggest that the ld mesenchyme is unable to induce the formation of a completely functional ridge. This primary defect causes a disruption of ridge function and subsequently leads to the patterning defects observed in ld limbs. We propose a model in which ridge induction requires at least two phases: an early competence phase, which includes induction of Fgf8 expression, and a later differentiation phase in which Fgf4 is induced and a morphological ridge is formed. Ld proteins appear to act during the differentiation phase.