Vertebrate limb outgrowth is driven by a positive feedback loop involving Sonic Hedgehog (Shh), Gremlin, and Fgf4. By overexpressing individual components of the loop at a time after these genes are normally down-regulated in chicken embryos, we found that Shh no longer maintains Gremlin in the posterior limb. Shh-expressing cells and their descendants cannot express Gremlin. The proliferation of these descendants forms a barrier separating the Shh signal from Gremlin-expressing cells, which breaks down the Shh-Fgf4 loop and thereby affects limb size and provides a mechanism explaining regulative properties of the limb bud.