FGFR2 is a membrane-spanning tyrosine kinase that serves as a high affinity receptor for several members of the fibroblast growth factor (FGF) family. To explore functions of FGF/FGFR2 signals in development, we have mutated FGFR2 by deleting the entire immunoglobin-like domain III of the receptor. We showed that murine FGFR2 is essential for chorioallantoic fusion and placenta trophoblast cell proliferation. Fgfr2(DeltaIgIII/DeltaIgIII) embryos displayed two distinct defects that resulted in failures in formation of a functional placenta. About one third of the mutants failed to form the chorioallantoic fusion junction and the remaining mutants did not have the labyrinthine portion of the placenta. Consequently, all mutants died at 10-11 days of gestation. Interestingly, Fgfr2(DeltaIgIII/DeltaIgIII) embryos do not form limb buds. Consistent with this defect, the expression of Fgf8, an apical ectodermal factor, is absent in the mutant presumptive limb ectoderm, and the expression of Fgf10, a mesenchymally expressed limb bud initiator, is down regulated in the underlying mesoderm. These findings provide direct genetic evidence that FGF/FGFR2 signals are absolutely required for vertebrate limb induction and that an FGFR2 signal is essential for the reciprocal regulation loop between FGF8 and FGF10 during limb induction.