It is believed that mouse dentition is determined by a prepatterning of the oral epithelium into molar (proximal) and incisor (distal) regions. The LIM homeodomain protein Islet1 (ISL1) is involved in the regulation of differentiation of many cell types and organs. During odontogenesis, we find Islet1 to be exclusively expressed in epithelial cells of the developing incisors but not during molar development. Early expression of Islet1 in presumptive incisor epithelium is coincident with expression of Bmp4, which acts to induce Msx1 expression in the underlying mesenchyme. To define the role of ISL1 in the acquisition of incisor shape, we have analysed regulation of Islet1 expression in mandibular explants. Local application of bone morphogenetic protein 4 (BMP4) in the epithelium of molar territories either by bead implantation or by electroporation stimulated Islet1 expression. Inhibition of BMP signalling with Noggin resulted in a loss of Islet1 expression. Inhibition of Islet1 in distal epithelium resulted in a loss of Bmp4 expression and a corresponding loss of Msx1 expression, indicating that a positive regulatory loop exists between ISL1 and BMP4 in distal epithelium. Ectopic expression of Islet1 in proximal epithelium produces a loss of Barx1 expression in the mesenchyme and resulted in inhibition of molar tooth development. Using epithelial/mesenchymal recombinations we show that at E10.5 Islet1 expression is independent of the underlying mesenchyme whereas at E12.5 when tooth shape specification has passed to the mesenchyme, Islet1 expression requires distal (presumptive incisor) mesenchyme. Islet1 thus plays an important role in regulating distal gene expression during jaw and tooth development.