In mammalian ureters, the lamina propria presents as a prominent layer of connective tissue underneath the urothelium. Despite its important structural and signaling functions, little is known how the lamina propria develops. Here, we show that in the murine ureter the lamina propria arises at late fetal stages and massively increases by fibrocyte proliferation and collagen deposition after birth. WNT, SHH, BMP4 and retinoic acid signaling are all active in the common mesenchymal progenitor of smooth muscle cells and lamina propria fibrocytes. However, around birth, the lamina propria becomes a target for epithelial WNT and SHH signals and a source of BMP4 and retinoic acid. SHH and WNT signaling promote lamina propria and smooth muscle cell differentiation and proliferation at fetal and early postnatal stages, whereas BMP4 signaling is required for early smooth muscle cell differentiation but not for its later maintenance. Our findings suggest that, in the presence of SHH and WNT signaling, it is the modulation of BMP4 signaling which is the major determinant for the segregation of lamina propria and smooth muscle cells.