Wnt-4, a member of the Wnt family of secreted signaling molecules, is essential for nephrogenesis, but its expression in the presumptive medulla suggests additional developmental roles in kidney organogenesis. We demonstrate here that Wnt-4 signaling plays also a role in the determination of the fate of smooth muscle cells in the medullary stroma of the developing kidney, as a differentiation marker, smooth muscle alpha-actin (alpha-SMA), is markedly reduced in the absence of its signaling. Wnt-4 probably performs this function by activating the Bmp-4 gene encoding a known differentiation factor for smooth muscle cells, since Bmp-4 gene expression was lost in the absence of Wnt-4 while Wnt-4 signaling led to a rescue of Bmp-4 expression and induction of alpha-SMA-positive cells in vitro. Recombinant Bmp-4 similarly rescued the differentiation of alpha-SMA-expressing cells in cultured Wnt-4-deficient embryonic kidney. The lack of smooth muscle cell differentiation leads to an associated deficiency in the pericytes around the developing vessels of the Wnt-4-deficient kidney and apparently leads to a secondary defect in the maturation of the kidney vessels. Thus, besides being critical for regulating mesenchymal to epithelial transformation in the cortical region in nephrogenesis, Wnt-4 signaling regulates the fate of smooth muscle cells in the developing medullary region.