Deletion of fibroblast growth factor receptor 3 (Fgfr3) leads to hearing impairment in mice due to defects in the development of the organ of Corti, the sensory epithelium of the Cochlea. To examine the role of FGFR3 in auditory development, cochleae from Fgfr3−/− mice were examined using anatomical and physiological methods. Deletion of Fgfr3 leads to the absence of inner pillar cells and an increase in other cell types, suggesting that FGFR3 regulates cell fate. Defects in outer hair cell differentiation were also observed and probably represent the primary basis for hearing loss. Furthermore, innervation defects were detected consistent with changes in the fiber guidance properties of pillar cells. To elucidate the mechanisms underlying the effects of FGFR3, we examined the expression of Bmp4, a known target. Bmp4 was increased in Fgfr3−/− cochleae, and exogenous application of bone morphogenetic protein 4 (BMP4) onto cochlear explants induced a significant increase in the outer hair cells, suggesting the Fgf and Bmp signaling act in concert to pattern the cochlea. Developmental Dynamics 236:1905–1917, 2007. Published 2007 Wiley-Liss, Inc.