Nephrons develop from mesenchymal cells that have contacted the ureteric bud (UB). To determine whether cell associated or secreted ureteric molecules induce the mesenchyme, we have isolated UB cell lines from mice transgenic for T antigen. These cells express epithelial and ureteric (Dolichos lectin staining, c-ret, c-met without hepatocyte growth factor) specific markers, which identifies them as authentic UB cells. Medium conditioned by our cells rescues mesenchyme from apoptosis without inducing the appearance of epithelial aggregates. The same was found by culturing mesenchymes upon the apical surface of a UB monolayer. In contrast, tubules were induced in mesenchymes contacting trypsinized pellets of UB cells. As revealed by staining for T antigen and Dolichos lectin or by prelabeling UB cells with 1,1'-dioctadecyl-3,3,3',3'-tetramethylindocarbocyanine perchlorate (DiI), we found that our cells encapsulated the mesenchyme but did not incorporate in the tubules. These data demonstrate that nephrogenesis is stimulated by two distinct ureteric signals, secreted molecules rescue the mesenchyme from apoptosis, whereas diffusion-limited basolateral molecules trigger mesenchymal/epithelial conversion.