Progesterone and estrogen are critical regulators of uterine receptivity. To facilitate uterine remodeling for embryo attachment, estrogen activity in the uterine epithelia is attenuated by progesterone; however, the molecular mechanism by which this occurs is poorly defined. COUP-TFII (chicken ovalbumin upstream promoter transcription factor II; also known as NR2F2), a member of the nuclear receptor superfamily, is highly expressed in the uterine stroma and its expression is regulated by the progesterone-Indian hedgehog-Patched signaling axis that emanates from the epithelium. To further assess COUP-TFII uterine function, a conditional COUP-TFII knockout mouse was generated. This mutant mouse is infertile due to implantation failure, in which both embryo attachment and uterine decidualization are impaired. Using this animal model, we have identified a novel genetic pathway in which BMP2 lies downstream of COUP-TFII. Epithelial progesterone-induced Indian hedgehog regulates stromal COUP-TFII, which in turn controls BMP2 to allow decidualization to manifest in vivo. Interestingly, enhanced epithelial estrogen activity, which impedes maturation of the receptive uterus, was clearly observed in the absence of stromal-derived COUP-TFII. This finding is consistent with the notion that progesterone exerts its control of implantation through uterine epithelial-stromal cross-talk and reveals that stromal-derived COUP-TFII is an essential mediator of this complex cross-communication pathway. This finding also provides a new signaling paradigm for steroid hormone regulation in female reproductive biology, with attendant implications for furthering our understanding of the molecular mechanisms that underlie dysregulation of hormonal signaling in such human reproductive disorders as endometriosis and endometrial cancer.