Glycosaminoglycans (GAGs) play a central role in embryonic development by regulating the movement and signaling of morphogens. We have previously demonstrated that GAGs are the co-receptors for Fgf10 signaling in the lacrimal gland epithelium, but their function in the Fgf10-producing periocular mesenchyme is still poorly understood. In this study, we have generated a mesenchymal ablation of UDP-glucose dehydrogenase (Ugdh), an essential biosynthetic enzyme for GAGs. Although Fgf10 RNA is expressed normally in the periocular mesenchyme, Ugdh mutation leads to excessive dispersion of Fgf10 protein, which fails to elicit an FGF signaling response or budding morphogenesis in the presumptive lacrimal gland epithelium. This is supported by genetic rescue experiments in which the Ugdh lacrimal gland defect is ameliorated by constitutive Ras activation in the epithelium but not in the mesenchyme. We further show that lacrimal gland development requires the mesenchymal expression of the heparan sulfate N-sulfation genes Ndst1 and Ndst2 but not the 6-O and 2-O-sulfation genes Hs6st1, Hs6st2 and Hs2st. Taken together, these results demonstrate that mesenchymal GAG controls lacrimal gland induction by restricting the diffusion of Fgf10.