One of the most striking aspects of plant diversity is variation in leaf shape. Much of this diversity is achieved by the modulation of leaf blade dissection to form lobes or leaflets. Here, we show that the phytohormone auxin is a crucial signal regulating the partitioned outgrowth necessary to develop a dissected leaf. In developing leaves, the asymmetric distribution of auxin, driven by active transport, delineates the initiation of lobes and leaflets and specifies differential laminar outgrowth. Furthermore, homologous members of the AUX/indole-3-acetic acid (IAA) gene family mediate the action of auxin in determining leaf shape by repressing outgrowth in areas of low auxin concentration during both simple and compound leaf development. These results provide molecular evidence that leaflets initiate in a process reminiscent of organogenesis at the shoot apical meristem, but that compound and simple leaves regulate marginal growth through an evolutionarily conserved mechanism, thus shedding light on the homology of compound and simple leaves.