Dlx-3, a homolog of Drosophila Dll, has been isolated from an axolotl blastema cDNA library, and its expression in developing and regenerating limbs characterized. The normal expression pattern, and the changes that occur during experimental treatments, indicate a correlation between Dlx-3 expression and the establishment of the outgrowth-permitting epidermis. Dlx-3 is expressed at high levels in a distal-to-proximal gradient in the epidermis of developing limb buds, and is upregulated in the apical ectodermal cap (AEC) during limb regeneration. Expression is maximal at the late bud stage of regeneration, coincident with the transition from the early phase of nerve dependency to the later phase of nerve independence. Dlx-3 expression in the epidermis is rapidly downregulated by denervation during the nerve-dependent phase and is unaffected by denervation during the nerve-independent phase. We investigated this relationship between nerves and Dlx-3 expression by implanting FGF-2 beads into regenerates that had been denervated at a nerve-dependent stage. Dlx-3 expression was maintained by FGF-2 after denervation, and regeneration progressed to completion. In addition, we detected FGF-2 protein in the AEC and in nerves, and observed that the level of expression in both tissues decreases dramatically in response to denervation. We conclude that both limb development and regeneration require a permissive epidermis, characterized by Dlx-3 and FGF expression, both of which are maintained by FGF through an autocrine loop. The transformation of the limb epidermis into a functional AEC that produces and responds to FGF autocatalytically, is presumed to be induced by FGF. Since nerves appear to be a source of this priming FGF, it is possible that a member of the FGF family of growth factors is the elusive neurotrophic factor of limb regeneration.