The kidney is a classic model for studying mechanisms of inductive tissue interactions associated with the epithelial branching common to many embryonic organs, but the molecular mechanisms are still poorly known. Sprouty proteins antagonize tyrosine kinases in the Egf and Fgf receptors and are candidate components of inductive signalling in the kidney as well. We have addressed the function of sprouty proteins in vivo by targeted expression of human sprouty 2 (SPRY2) in the ureteric bud, which normally expresses inductive signals and mouse sprouty 2 (Spry2). Ectopic SPRY2 expression led to postnatal death resulting from kidney failure, manifested as unilateral agenesis, lobularization of the organ or reduction in organ size because of inhibition of ureteric branching. The experimentally induced dysmorphology associated with deregulated expression of Wnt11, Gdnf and Fgf7 genes in the early stages of organogenesis indicated a crucial role for sprouty function in coordination of epithelial-mesenchymal and stromal signalling, the sites of expression of these genes. Moreover, Fgf7 induced Spry2 gene expression in vitro and led with Gdnf to a partial rescue of the SPRY2-mediated defect in ureteric branching. Remarkably, it also led to supernumerary epithelial bud formation from the Wolffian duct. Together, these data suggest that Spry genes contribute to reciprocal epithelial-mesenchymal and stromal signalling controlling ureteric branching, which involves the coordination of Ffg/Wnt11/Gdnf pathways.