Organs are anatomically compartmentalised to cater for specialised functions. In the small intestine (SI), regionalisation enables sequential processing of food and nutrient absorption. While several studies indicate the critical importance of non-epithelial cells during development and homeostasis, the extent to which these cells contribute to regionalisation during morphogenesis remains unexplored. Here, we identify a mesenchymal-epithelial crosstalk that shapes the developing SI during late morphogenesis. We find that subepithelial mesenchymal cells are characterised by gradients of factors supporting Wnt signalling and stimulate epithelial growth in vitro. Such a gradient impacts epithelial gene expression and regional villus formation along the anterior-posterior axis of the SI. Notably, we further provide evidence that Wnt signalling directly regulates epithelial expression of Sonic Hedgehog (SHH), which, in turn, acts on mesenchymal cells to drive villi formation. Taken together our results uncover a mechanistic link between Wnt and Hedgehog signalling across different cellular compartments that is central for anterior-posterior regionalisation and correct formation of the SI.