A fundamental question in developmental biology is how does an undifferentiated field of cells acquire spatial pattern and undergo coordinated differentiation? The development of the vertebrate limb is an important paradigm for understanding these processes. The skeletal and connective tissues of the developing limb all derive from a population of multipotent progenitor cells located in its distal tip. During limb outgrowth, these progenitors segregate into a chondrogenic lineage, located in the center of the limb bud, and soft connective tissue lineages located in its periphery. We report that the interplay of two families of signaling proteins, fibroblast growth factors (FGFs) and Wnts, coordinate the growth of the multipotent progenitor cells with their simultaneous segregation into these lineages. FGF and Wnt signals act together to synergistically promote proliferation while maintaining the cells in an undifferentiated, multipotent state, but act separately to determine cell lineage specification. Withdrawal of both signals results in cell cycle withdrawal and chondrogenic differentiation. Continued exposure to Wnt, however, maintains proliferation and re-specifies the cells towards the soft connective tissue lineages. We have identified target genes that are synergistically regulated by Wnts and FGFs, and show how these factors actively suppress differentiation and promote growth. Finally, we show how the spatial restriction of Wnt and FGF signals to the limb ectoderm, and to a specialized region of it, the apical ectodermal ridge, controls the distribution of cell behaviors within the growing limb, and guides the proper spatial organization of the differentiating tissues.