During embryogenesis, multipotent progenitors within the single-layered surface epithelium differentiate to form the epidermis and its appendages. Here, we show that microRNAs (miRNAs) have an essential role in orchestrating these events. We cloned more than 100 miRNAs from skin and show that epidermis and hair follicles differentially express discrete miRNA families. To explore the functional significance of this finding, we conditionally targeted Dicer1 gene ablation in embryonic skin progenitors. Within the first week after loss of miRNA expression, cell fate specification and differentiation were not markedly impaired, and in the interfollicular epidermis, apoptosis was not markedly increased. Notably, however, developing hair germs evaginate rather than invaginate, thereby perturbing the epidermal organization. Here we characterize miRNAs in skin, the existence of which was hitherto unappreciated, and demonstrate their differential expression and importance in the morphogenesis of epithelial tissues within this vital organ.