Background The role of ß-catenin signaling in mesodermal lineage formation and differentiation has been elusive. Methodology To define the role of ß-catenin signaling in these processes, we used a Dermo1(Twist2)Cre/+ line to target a floxed β-catenin allele, throughout the embryonic mesenchyme. Strikingly, the Dermo1Cre/+; β-cateninf/− conditional Knock Out embryos largely phenocopy Pitx1−/−/Pitx2−/− double knockout embryos, suggesting that ß-catenin signaling in the mesenchyme depends mostly on the PITX family of transcription factors. We have dissected this relationship further in the developing lungs and find that mesenchymal deletion of β-catenin differentially affects two major mesenchymal lineages. The amplification but not differentiation of Fgf10-expressing parabronchial smooth muscle progenitor cells is drastically reduced. In the angioblast-endothelial lineage, however, only differentiation into mature endothelial cells is impaired. Conclusion Taken together these findings reveal a hierarchy of gene activity involving ß-catenin and PITX, as important regulators of mesenchymal cell proliferation and differentiation.