Tracheobronchomalacia is a common congenital defect in which the walls of the trachea and bronchi lack of adequate cartilage required for support of the airways. Deletion of Wls, a cargo receptor mediating Wnt ligand secretion, in the embryonic endoderm using ShhCre mice inhibited formation of tracheal-bronchial cartilaginous rings. The normal dorsal-ventral patterning of tracheal mesenchyme was lost. Smooth muscle cells, identified by Acta2 staining, were aberrantly located in ventral mesenchyme of the trachea, normally the region of Sox9 expression in cartilage progenitors. Wnt/β-catenin activity, indicated by Axin2 LacZ reporter, was decreased in tracheal mesenchyme of Wls(f/f);Shh(Cre/+) embryos. Proliferation of chondroblasts was decreased and reciprocally, proliferation of smooth muscle cells was increased in Wls(f/f);Shh(Cre/+) tracheal tissue. Expression of Tbx4, Tbx5, Msx1 and Msx2, known to mediate cartilage and muscle patterning, were decreased in tracheal mesenchyme of Wls(f/f);Shh(Cre/+) embryos. Ex vivo studies demonstrated that Wnt7b and Wnt5a, expressed by the epithelium of developing trachea, and active Wnt/β-catenin signaling are required for tracheal chondrogenesis before formation of mesenchymal condensations. In conclusion, Wnt ligands produced by the tracheal epithelium pattern the tracheal mesenchyme via modulation of gene expression and cell proliferation required for proper tracheal cartilage and smooth muscle differentiation.