MicroRNAs have emerged as essential regulators of gene expression and may play important roles in a variety of human disorders. To understand the role of microRNA-mediated gene regulation in the kidney, we deleted the microRNA-processing enzyme Dicer in developing renal tubules and parts of the ureteric bud in mice. Genetic deletion of Dicer resulted in renal failure and death of the animals at 4–6 weeks of age. Interestingly, the kidneys of microRNA-deficient animals were small due to a reduced number of nephrons and showed massive hydronephrosis due to ureteropelvic junction obstruction. This phenotype is reminiscent of congenital anomalies of the kidney and urinary tract (CAKUT), an important group of human disorders characterized by a combination of renal hypoplasia with congenital abnormalities of the urinary tract. We used metanephric kidney cultures to examine the developmental defects underlying these pathologies. Dicer knockout kidneys showed a significant reduction of tubular branching explaining renal hypoplasia. Moreover, the ureters of these kidneys showed an altered morphology and impaired motility. These functional changes went along with altered expression of smooth muscle actin implying a defect in the differentiation of ureteric smooth muscle cells. In addition, we show the polycystic kidney disease gene Pkd1 to be a target of miR-20 implying that this interaction may contribute to the molecular basis for the cystogenesis in our model. In conclusion, these data demonstrate an essential role for microRNA-dependent gene regulation in mammalian kidney development and suggest that deregulation of microRNAs may underlie CAKUT, the most important group of renal disorders in humans.