Ureteric contractions propel foetal urine from the kidney to the urinary bladder. Here, we show that mouse ureteric smooth muscle cell (SMC) precursors express the transcription factor teashirt 3 (TSHZ3), and that Tshz3-null mutant mice have congenital hydronephrosis without anatomical obstruction. Ex vivo, the spontaneous contractions that occurred in proximal segments of wild-type embryonic ureter explants were absent in Tshz3 mutant ureters. In vivo, prior to the onset of hydronephrosis,mutant proximal ureters failed to express contractile SMC markers, whereas these molecules were detected in controls. Mutant embryonic ureters expressed Shh and Bmp4 transcripts as normal, with appropriate expression of Ptch1 and pSMAD1/5/8 in target SM precursors, whereas myocardin, a key regulator for SMC differentiation, was not expressed in Tshz3-null ureters. In wild-type embryonic renal tract explants,exogenous BMP4 upregulated Tshz3 and myocardin expression. More interestingly, in Tshz3 mutant renal tract explants, exogenous BMP4 did not improve the Tshz3 phenotype. Thus, Tshz3 is required for proximal ureteric SMC differentiation downstream of SHH and BMP4. Furthermore, the Tshz3 mutant mouse model of `functional' urinary obstruction resembles congenital pelvi-ureteric junction obstruction, a common human malformation, suggesting that TSHZ, or related, gene variants may contribute to this disorder.