Mesenchymal cells underlying the definitive endoderm in vertebrate animals play a vital role in digestive and respiratory organogenesis. Although several signaling pathways are implicated in foregut patterning and morphogenesis, and despite the clinical importance of congenital tracheal and esophageal malformations in humans, understanding of molecular mechanisms that allow a single tube to separate correctly into the trachea and esophagus is incomplete. The homoebox gene Barx1 is highly expressed in prospective stomach mesenchyme and required to specify this organ. We observed lower Barx1 expression extending contiguously from the proximal stomach domain, along the dorsal anterior foregut mesenchyme and in mesenchymal cells between the nascent esophagus and trachea. This expression pattern exactly mirrors the decline in Wnt signaling activity in late development of the adjacent dorsal foregut endoderm and medial mainstem bronchi. The hypopharynx in Barx1(-/-) mouse embryos is abnormally elongated and the point of esophago-tracheal separation shows marked caudal displacement, resulting in a common foregut tube that is similar to human congenital tracheo-esophageal fistula and explains neonatal lethality. Moreover, the Barx1(-/-) esophagus displays molecular and cytologic features of respiratory endoderm, phenocopying abnormalities observed in mouse embryos with activated ß-catenin. The zone of canonical Wnt signaling is abnormally prolonged and expanded in the proximal Barx1(-/-) foregut. Thus, as in the developing stomach, but distinct from the spleen, Barx1 control of thoracic foregut specification and tracheo-esophageal septation is tightly associated with down-regulation of adjacent Wnt pathway activity.