Skin appendages, such as hair, develop as a result of complex reciprocal signaling between epithelial and mesenchymal cells. These interactions are not well understood at the molecular level. Platelet-derived growth factor-A (PDGF-A) is expressed in the developing epidermis and hair follicle epithelium, and its receptor PDGF-Ralpha is expressed in associated mesenchymal structures. Here we have characterized the skin and hair phenotypes of mice carrying a null mutation in the PDGF-A gene. Postnatal PDGF-A−/− mice developed thinner dermis, misshapen hair follicles, smaller dermal papillae, abnormal dermal sheaths and thinner hair, compared with wild-type siblings. BrdU labeling showed reduced cell proliferation in the dermis and in the dermal sheaths of PDGF-A−/− skin. PDGF-A−/− skin transplantation to nude mice led to abnormal hair formation, reproducing some of the features of the skin phenotype of PDGF-A−/− mice. Taken together, expression patterns and mutant phenotypes suggest that epidermal PDGF-A has a role in stimulating the proliferation of dermal mesenchymal cells that may contribute to the formation of dermal papillae, mesenchymal sheaths and dermal fibroblasts. Finally, we show that sonic hedgehog (shh)−/− mouse embryos have disrupted formation of dermal papillae. Such embryos fail to form pre-papilla aggregates of postmitotic PDGF-Ralpha-positive cells, suggesting that shh has a critical role in the assembly of the dermal papilla.