Epithelial integrity in metazoan organs is maintained through the regulated proliferation and differentiation of organ-specific stem and progenitor cells. Although the epithelia of organs such as the intestine regenerate constantly and thus remain continuously proliferative, other organs, such as the mammalian urinary bladder, shift from near-quiescence to a highly proliferative state in response to epithelial injury. The cellular and molecular mechanisms underlying this injury-induced mode of regenerative response are poorly defined. Here we show in mice that the proliferative response to bacterial infection or chemical injury within the bladder is regulated by signal feedback between basal cells of the urothelium and the stromal cells that underlie them. We demonstrate that these basal cells include stem cells capable of regenerating all cell types within the urothelium, and are marked by expression of the secreted protein signal Sonic hedgehog (Shh). On injury, Shh expression in these basal cells increases and elicits increased stromal expression of Wnt protein signals, which in turn stimulate the proliferation of both urothelial and stromal cells. The heightened activity of this signal feedback circuit and the associated increase in cell proliferation appear to be required for restoration of urothelial function and, in the case of bacterial injury, may help clear and prevent further spread of infection. Our findings provide a conceptual framework for injury-induced epithelial regeneration in endodermal organs, and may provide a basis for understanding the roles of signalling pathways in cancer growth and metastasis.