Signals that govern development of the osteoblast lineage are not well understood. Indian hedgehog (Ihh), a member of the hedgehog (Hh) family of proteins, is essential for osteogenesis in the endochondral skeleton during embryogenesis. The canonical pathway of Wnt signaling has been implicated by studies of Lrp5, a co-receptor for Wnt proteins, in postnatal bone mass homeostasis. In the present study we demonstrate that beta-catenin, a central player in the canonical Wnt pathway, is indispensable for osteoblast differentiation in the mouse embryo. Moreover, we present evidence that Wnt signaling functions downstream of Ihh in development of the osteoblast lineage. Finally Wnt7b is identified as a potential endogenous ligand regulating osteogenesis. These data support a model that integrates Hh and Wnt signaling in the regulation of osteoblast development.