During embryonic and postnatal development, Wnt/beta-catenin signaling is involved in several stages of hair morphogenesis from placode formation to hair shaft differentiation. Using a transgenic approach, we have investigated further the role of beta-catenin signaling in embryonic hair development. Forced epithelial stabilization of beta-catenin resulted in precocious and excessive induction of hair follicles even in the absence of Eda/Edar signaling, a pathway essential for primary hair placode formation. In addition, the spacing and size of the placodes was randomized. Surprisingly, the down-growth of follicles was suppressed and hair shaft production was severely impaired. Gene and reporter expression analyses revealed elevated mesenchymal Wnt activity, as well as increased BMP signaling, throughout the skin that was accompanied by upregulation of Sostdc1 (Wise, ectodin) expression. Our data suggest that BMPs are downstream of Wnt/beta-catenin and that their interplay may be a critical component in establishing correct patterning of hair follicles through the reaction-diffusion mechanism.