The kidney of the Gpc3-/ mouse, a novel model of human renal dysplasia, is characterized by selective degeneration of medullary collecting ducts preceded by enhanced cell proliferation and overgrowth during branching morphogenesis. Here, we identify cellular and molecular mechanisms underlying this renal dysplasia. Glypican-3 (GPC3) deficiency was associated with abnormal and contrasting rates of proliferation and apoptosis in cortical (CCD) and medullary collecting duct (MCD) cells. In CCD, cell proliferation was increased threefold. In MCD, apoptosis was increased 16-fold. Expression of Gpc3 mRNA in ureteric bud and collecting duct cells suggested that GPC3 can exert direct effects in these cells. Indeed, GPC3 deficiency abrogated the inhibitory activity of BMP2 on branch formation in embryonic kidney explants, converted BMP7-dependent inhibition to stimulation, and enhanced the stimulatory effects of KGF. Similar comparative differences were found in collecting duct cell lines derived from GPC3-deficient and wild type mice and induced to form tubular progenitors in vitro, suggesting that GPC3 directly controls collecting duct cell responses. We propose that GPC3 modulates the actions of stimulatory and inhibitory growth factors during branching morphogenesis.