The vertebrate limb initially develops as a bud of mesenchymal cells that subsequently aggregate in a proximal to distal (P-D) sequence to give rise to cartilage condensations that prefigure all limb skeletal components. Of the three cardinal limb axes, the mechanisms that lead to establishment and patterning of skeletal elements along the P-D axis are the least understood. Here we identify a genetic interaction between Gli3 (GLI-Kruppel family member 3) and Plzf (promyelocytic leukaemia zinc finger, also known as Zbtb16 and Zfp145), which is required specifically at very early stages of limb development for all proximal cartilage condensations in the hindlimb (femur, tibia, fibula). Notably, distal condensations comprising the foot are relatively unperturbed in Gli3(-/-);Plzf(-/-) mouse embryos. We demonstrate that the cooperative activity of Gli3 and Plzf establishes the correct temporal and spatial distribution of chondrocyte progenitors in the proximal limb-bud independently of known P-D patterning markers and overall limb-bud size. Moreover, the limb defects in Gli3(-/-);Plzf(-/-) embryos correlate with the transient death of a specific subset of proximal mesenchymal cells that express bone morphogenetic protein receptor, type 1B (Bmpr1b) at the onset of limb development. These findings suggest that the development of proximal and distal skeletal elements is distinctly regulated early during limb-bud formation. The initial division of the vertebrate limb into two distinct molecular domains is consistent with fossil evidence indicating that the upper and lower extremities of the limb have different evolutionary origins.