The essential roles of SHH in anteroposterior (AP) and AER-FGF signalling in proximodistal (PD) limb bud development are well understood. In addition, these morphoregulatory signals are key components of the self-regulatory SHH/GREM1/AER-FGF feedback signalling system that regulates distal progression of limb bud development. This study uncovers an additional signalling module required for coordinated progression of limb bud axis development. Transcriptome analysis using Shh-deficient mouse limb buds revealed that the expression of proximal genes was distally extended from early stages onwards, which pointed to a more prominent involvement of SHH in PD limb axis development. In particular, retinoic acid (RA) target genes were upregulated proximally, while the expression of the RA-inactivating Cyp26b1 enzyme was downregulated distally, pointing to increased RA activity in Shh-deficient mouse limb buds. Further genetic and molecular analysis established that Cyp26b1 expression is regulated by AER-FGF signalling. During initiation of limb bud outgrowth, the activation of Cyp26b1 expression creates a distal ‘RA-free’ domain, as indicated by complementary downregulation of a transcriptional sensor of RA activity. Subsequently, Cyp26b1 expression increases as a consequence of SHH-dependent upregulation of AER-FGF signalling. To better understand the underlying signalling interactions, computational simulations of the spatiotemporal expression patterns and interactions were generated. These simulations predicted the existence of an antagonistic AER-FGF/CYP26B1/RA signalling module, which was verified experimentally. In summary, SHH promotes distal progression of limb development by enhancing CYP26B1-mediated RA clearance as part of a signalling network linking the SHH/GREM1/AER-FGF feedback loop to the newly identified AER-FGF/CYP26B1/RA module.