The hair follicle is a unique skin appendage, with the ability to continually regenerate from a population of multipotent epidermal stem cells relying on signals from the dermal papilla, a condensed region of dermal cells at the hair follicle base. Although Sox18 is reported to be important for the specification of the most frequent murine and human scalp hair types, very little is known about its function during hair development. Using murine models, the RaOP mouse, with a dominant negative mutation in the sox18 gene, and a Sox18-GFP reporter, we investigated this role. Sox18 was expressed specifically in hair follicle dermal papilla and not in the epidermal compartment from birth to P21. In RaOp mice, Sox2 dependent Guard and Awl hair follicle types are observed, however many epidermal buds do not develop normally despite expressing classical epidermal stem cell markers, including Sox9 or Keratin15. Labelling with Alkaline phosphatase demonstrated dermal papilla development is inhibited, suggesting the importance of Sox18 in this process. Similarly, Integrin alpha 8, CD133 and other dermal papilla markers confirmed these findings. We demonstrated in hair regeneration assays that keratinocytes from RaOp mice could form hair follicles when combined with WT dermal spheroids. In contrast, dermal spheroids from RaOp mice could not induce hair follicle regeneration even when combined with WT keratinocytes. To further understand Sox18 function, gene expression arrays were performed on WT and RaOp dermal spheroids and revealed over 600 differentially expressed genes, some already known regulators of hair follicle development and cycling such as Wnt5a, MMP9 or Retinoic acid. In conclusion, Sox18/RaOP mutation results in the inhibition of dermal papilla differentiation and prevents the mesenchymal epidermal cross talk during hair follicle development. These studies are therefore unravelling the molecular mechanisms behind key developmental processes.