The diaphragm is a domed muscle between the thorax and abdomen essential for breathing in mammals. Diaphragm development requires the coordinated development of muscle, connective tissue, and nerve, which are derived from different embryonic sources. Defects in diaphragm development cause the common and often lethal birth defect, Congenital Diaphragmatic Hernias (CDH). HGF/MET signaling is required for diaphragm muscularization, but the source of HGF and the specific functions of this pathway in muscle progenitors or potentially the phrenic nerve have not been explicitly tested. Using conditional mutagenesis and pharmacological inhibition of MET, we demonstrate that the pleuroperitoneal folds (PPFs), transient embryonic structures that give rise to the connective tissue, are the source of HGF critical for diaphragm muscularization and phrenic nerve primary branching. HGF not only is required for recruitment of muscle progenitors to the diaphragm, but is continuously required for maintenance and motility of the pool of progenitors to enable full muscularization. Thus, the connective tissue fibroblasts and HGF coordinately regulate diaphragm muscularization and innervation. Defects in PPF-derived HGF result in muscleless regions that are susceptible to CDH.