Proper formation of ureteral smooth muscle cells (SMCs) during embryogenesis is essential for ureter peristalsis that propels urine from the kidney to the bladder in mammals. Currently the molecular factors that regulate differentiation of ureteral mesenchymal cells into SMCs are incompletely understood. A recent study has reported that Smad4 deficiency reduces the number of ureteral SMCs. However, its precise role in the ureteral smooth muscle development remains largely unknown. Here, we used Tbx18:Cre knock-in mouse line to delete Smad4 to examine its requirement in the development of ureteral mesenchyme and SMC differentiation. We found that mice with specific deletion of Smad4 in Tbx18-expressing ureteral mesenchyme exhibited hydroureter and hydronephrosis at embryonic day (E) 16.5, and the mutant mesenchymal cells failed to differentiate into SMCs with increased apoptosis and decreased proliferation. Molecular markers for SMCs including alpha smooth muscle actin (α-SMA) and smooth muscle myosin heavy chain (SM-MHC) were absent in the mutant ureters. Moreover, disruption of Smad4 significantly reduced the expression of genes, including Sox9, Tbx18 and Myocardin associated with SMC differentiation. These findings suggest that Smad4 is essential for initiating the SMC differentiation program during ureter development.