X-linked and autosomal forms of anhidrotic ectodermal dysplasia syndromes (HED) are characterized by deficient development of several ectodermal organs, including hair, teeth and exocrine glands. The recent cloning of the genes that underlie these syndromes, ectodysplasin (ED1) and the ectodysplasin A receptor (EDAR), and their identification as a novel TNF ligand-receptor pair suggested a role for TNF signaling in embryonic morphogenesis. In the mouse, the genes of the spontaneous mutations Tabby (Ta) and downless (dl) were identified as homologs of ED1 and EDAR, respectively. To gain insight into the function of this signaling pathway in development of skin and hair follicles, we analyzed the expression and regulation of Eda and Edar in wild type as well as Tabby and Lef1 mutant mouse embryos. We show that Eda and Edar expression is confined to the ectoderm and occurs in a pattern that suggests a role of ectodysplasin/Edar signaling in the interactions between the ectodermal compartments and the formation and function of hair placodes. By using skin explant cultures, we further show that this signaling pathway is intimately associated with interactions between the epithelial and mesenchymal tissues. We also find that Ta mutants lack completely the placodes of the first developing tylotrich hairs, and that they do not show patterned expression of placodal genes, including Bmp4, Lef1, Shh, Ptch and Edar, and the genes for beta-catenin and activin A. Finally, we identified activin as a mesenchymal signal that stimulates Edar expression and WNT as a signal that induces Eda expression, suggesting a hierarchy of distinct signaling pathways in the development of skin and hair follicles. In conclusion, we suggest that Eda and Edar are associated with the onset of ectodermal patterning and that ectodysplasin/edar signaling also regulates the morphogenesis of hair follicles.