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Urethral groove (UG) formation is an important step in penile formation. Because commonly used animal models do not have UG, the mechanisms of UG formation have never been discovered. We aim to discover the cellular mechanism of the UG formation using guinea pig model. Histology was used to study the ontogeny of UG. BrdU immunofluorescence was used to label proliferating cells, cell death was determined using LysoTracker Red and TUNEL staining, and stereology was used for quantification. To reveal Shh mRNA expression patterns, in situ hybridization was performed in guinea pig genital tubercles (GTs) and ShhGFPcre-LacZ-reporter mice were used for comparison. Cell proliferation in the outer layers and programmed cell death in the inner layers of urethral epithelium played key roles during urethral canal movement from dorsal to ventral aspect and final opening to form UG. Shh mRNA expression domain shifted out to the ventral surface of GT from proximal throughout to distal in guinea pigs, but was excluded from the ventral surface epithelium in midshaft and distal of mouse GT. Differential cell proliferation and cell death in developing urethral epithelium lead to UG formation and Shh expression in ventral surface epithelium of GT may play an important role.