Peripheral nerve development results from multiple cellular interactions between axons, Schwann cells and the surrounding mesenchymal tissue. The delayed axonal sorting and hypomyelination throughout the peripheral nervous system of claw paw (clp) mutant mice suggest that the clp gene product is critical for these interactions. Here we identify the clp mutation as a 225-bp insertion in the Lgi4 gene. Lgi4 encodes a secreted and glycosylated leucine-rich repeat protein and is expressed in Schwann cells. The clp mutation affects Lgi4 mRNA splicing, resulting in a mutant protein that is retained in the cell. Additionally, siRNA-mediated downregulation of Lgi4 in wild-type neuron-Schwann cell cocultures inhibits myelination, whereas exogenous Lgi4 restores myelination in clp/clp cultures. Thus, the abnormalities observed in clp mice are attributable to the loss of Lgi4 function, and they identify Lgi4 as a new component of Schwann cell signaling pathway(s) that controls axon segregation and myelin formation.