Smooth muscle cells (SMCs) are a key component of many visceral organs, including the ureter, yet the molecular pathways that regulate their development from mesenchymal precursors are insufficiently understood. Here, we identified epithelial Wnt7b and Wnt9b as possible ligands of Fzd1-mediated β-catenin (Ctnnb1)-dependent (canonical) Wnt signaling in the adjacent undifferentiated ureteric mesenchyme. Mice with a conditional deletion of Ctnnb1 in the ureteric mesenchyme exhibited hydroureter and hydronephrosis at newborn stages due to functional obstruction of the ureter. Histological analysis revealed that the layer of undifferentiated mesenchymal cells directly adjacent to the ureteric epithelium did not undergo characteristic cell shape changes, exhibited reduced proliferation and failed to differentiate into SMCs. Molecular markers for prospective SMCs were lost, whereas markers of the outer layer of the ureteric mesenchyme fated to become adventitial fibroblasts were expanded to the inner layer. Conditional misexpression of a stabilized form of Ctnnb1 in the prospective ureteric mesenchyme resulted in the formation of a large domain of cells that exhibited histological and molecular features of prospective SMCs and differentiated along this lineage. Our analysis suggests that Wnt signals from the ureteric epithelium pattern the ureteric mesenchyme in a radial fashion by suppressing adventitial fibroblast differentiation and initiating smooth muscle precursor development in the innermost layer of mesenchymal cells.