In humans and mice, mutations in the Ret gene result in Hirschsprung's disease and renal defects. In the embryonic kidney, binding of Ret to its ligand, Gdnf, induces a program of epithelial cell remodeling that controls primary branch formation and branching morphogenesis within the kidney. Our previous studies showed that transcription factors belonging to the retinoic acid (RA) receptor family are crucial for controlling Ret expression in the ureteric bud; however, the mechanism by which retinoid-signaling acts has remained unclear. In the current study, we show that expression of a dominant-negative RA receptor in mouse ureteric bud cells abolishes Ret expression and Ret-dependent functions including ureteric bud formation and branching morphogenesis, indicating that RA-receptor signaling in ureteric bud cells is crucial for renal development. Conversely, we find that RA-receptor signaling in ureteric bud cells depends mainly on RA generated in nearby stromal cells by retinaldehyde dehydrogenase 2, an enzyme required for most fetal RA synthesis. Together, these studies suggest that renal development depends on paracrine RA signaling between stromal mesenchyme and ureteric bud cells that regulates Ret expression both during ureteric bud formation and within the developing collecting duct system.