Recently canonical Wnt signaling in the ectoderm has been shown to be required for maintenance of the apical ectodermal ridge (AER) and for dorsoventral signaling. Using conditional gain- and loss-of-function beta-catenin alleles, we have studied the role of mesenchymal beta-catenin activity during limb development. Here, we show that loss of beta-catenin results in limb truncations due to a defect in AER maintenance. Stabilization of beta-catenin also results in truncated limbs, caused by a premature regression of the AER. Concomitantly, in these limbs, the expression of Bmp2, Bmp4 and Bmp7, and of the Bmp target genes Msx1, Msx2 and gremlin, is expanded in the mesenchyme. Furthermore, we found that the expression of Lmx1b, a gene exclusively expressed in the dorsal limb mesenchyme and involved in dorsoventral patterning, is reduced upon loss of beta-catenin activity and is expanded ventrally in gain-of-function limbs. However, the known ectodermal regulators Wnt7a and engrailed 1 are expressed normally. This suggests that Lmx1b is also regulated, in part, by a beta-catenin-mediated Wnt signal, independent of the non-canoncial Wnt7a signaling pathway. In addition, loss of beta-catenin results in a severe agenesis of the scapula. Concurrently, the expression of two genes, Pax1 and Emx2, which have been implicated in scapula development, is lost in beta-catenin loss-of-function limbs; however, only Emx2 is upregulated in gain-of-function limbs. Mesenchymal beta-catenin activity is therefore required for AER maintenance, and for normal expression of Lmx1b and Emx2.