Genital malformations are among the most common human birth defects, and both genetic and environmental factors can contribute to these malformations. Development of the external genitalia in mammals relies on complex signaling networks, and disruption of these signaling pathways can lead to genital defects. Islet-1 (ISL1), a member of the LIM/Homeobox family of transcription factors, has been identified as a major susceptibility gene for classic bladder exstrophy in humans, a common form of the bladder exstrophy-epispadias complex (BEEC), and is implicated in a role in urinary tract development. We report that deletion of Isl1 from the genital mesenchyme in mice led to hypoplasia of the genital tubercle and prepuce, with an ectopic urethral opening and epispadias-like phenotype. These mice also developed hydroureter and hydronephrosis. Identification of ISL1 transcriptional targets via ChIP-Seq and expression analyses revealed that Isl1 regulates several important signaling pathways during embryonic genital development, including the BMP, WNT, and FGF cascades. An essential function of Isl1 during development of the external genitalia is to induce Bmp4-mediated apoptosis in the genital mesenchyme. Together, these studies demonstrate that Isl1 plays a critical role during development of the external genitalia and forms the basis for a greater understanding of the molecular mechanisms underlying the pathogenesis of BEEC and urinary tract defects in humans.